The nominal rate describes accrual without considering how often interest is added to the principal. The effective rate standardizes the result to an annual basis, allowing comparison of offers with different compounding frequencies.
For deposits, the difference arises from compounding: with monthly interest accrual, the actual annual return exceeds the nominal rate, and the more frequent the compounding, the larger the gap. The effective rate answers the question of how much will be in the account after one year.
For loans, the logic is reversed: the effective cost accounts not only for interest but also accompanying mandatory payments, making it higher than the stated rate. To compare loan offers, the total cost of credit is used, calculated on the same principle.
General rule: only indicators of the same type can be compared. Comparing one bank's nominal rate with another's effective rate produces incorrect conclusions, and a final investment assessment also requires adjustment for inflation.