The effective annual rate is the interest a rate actually produces over one year once compounding is counted. A rate quoted as 18% a year and charged monthly costs 1.5% a month, and twelve months of 1.5%, each charged on a balance that already includes the last, come to 19.56%, not 18%.
The formula is (1 + quoted rate ÷ m)^m − 1, where m is the number of times a year interest is added. The more often it is added, the further the effective rate climbs above the quoted one, but the extra shrinks quickly: at 6%, yearly compounding gives 6%, monthly 6.168% and daily 6.183%. Only the rate itself and the time it runs move the answer much.
Savings accounts publish this figure under another name, the AER in the UK or the APY in the US. For borrowing the picture depends on the country. The UK and EU APR, the APRC, is an effective annual rate that also counts fees, as the FCA's definition of an annual percentage of the total credit makes clear. A US APR is not one: Regulation Z multiplies the monthly rate by 12, so a card at 18% APR has the 19.56% effective rate worked out above.
Canada builds the idea into its mortgages. The Interest Act requires a mortgage to state its rate calculated yearly or half-yearly, not in advance, so a 5% Canadian rate means 2.5% each half-year, an effective 5.0625% a year. The mortgage calculator turns that into a monthly rate of about 0.4124%, the rate that compounds six times to 2.5%, rather than 5% ÷ 12. The compound interest calculator shows the effective annual rate beside every projection.