Borrower is often confronted with a stated interest rate and an effective interest rate What is the difference and which one should the financial manager recognize as the true cost of borrowing?

The stated interest rate is exactly that. If you are approved for a loan of $XXXXXX.XX at 12%, then 12% is the stated interest rate. The effective rate is the stated rate divided by how many times it will be compounded over the year, so a simple way to explain is if the interest on your loan for $XXXXXX.XX at 12% is compounded quarterly (every 3 months), then your effective interest rate would be 4%.

This might not be entirely accurate, but I am almost positive that it is. I am taking an Accounting final tomorrow where this stuff is a major portion of the test, and have been going over it for quite some time now.

Hope this helps!