Annualization enables comparability: a 3% quarterly return and 11% annual return are different figures that can only be compared using the same time measurement. Almost all deposit and loan rates are quoted on an annualized basis, even if the actual term is shorter.
The nominal annual rate does not account for compounding. If interest is calculated and added to the deposit monthly, the actual annual return will exceed the nominal rate—this figure is called the effective rate. The more frequent the compounding, the greater the difference.
For loans, the mirror principle applies: the stated rate does not reflect fees, insurance, and repayment terms, so offers must be compared using the total cost of credit. The general rule is simple—only indicators of the same type can be compared: nominal with nominal, effective with effective.