APY vs APR: What’s the Difference?
APY (Annual Percentage Yield) and APR (Annual Percentage Rate) are both financial terms used to express the rate of return or cost of borrowing. While they are similar in concept,there are key differences between them:
Posted on 25 Sep 2023
APR (Annual Percentage Rate):
- APR is used to describe the cost of borrowing or the interest rate on a loan or credit card.
- It represents the annual cost of borrowing, including both the interest rate and any additional fees or charges.
- APR does not take compounding into account, assuming the interest is calculated only once a year.
APY (Annual Percentage Yield):
- APY is used to describe the rate of return on savings accounts, investments, or other financial products.
- It represents the total annual growth including both the interest rate and the effect of compounding.
- APY takes into account how often the interest is compounded within a year, which can significantly impact the overall return.
In summary, APR is used to calculate the cost of borrowing, while APY is used to calculate the return on investment or savings. APR considers only the interest rate and fees, while APY considers the interest rate and the effect of compounding.
