If you take a loan of $100 at 5% compounded interest per year, and pay for it over 12 months, you'd have paid the following:
Monthly Payments - $8.56
Total Payments - $102.73
That is clearly less than 5% interest. In fact, intuitively, you'd have expected to pay > 5% in effective interest rate. Yet you don't even pay 5% in interest!
How does this work out??