Business Finance

APR vs APY – What is the Difference Between Them?

Difference between apr vs apy

APR and APY are two separate terms, however, these terms confuse the people when they come side by side. Though they seem the same, a remarkable difference lies among both these terminologies. Both, APR and APY, are used for interest rates, however, they represent two different ideas. You may say that the APR is the annual interest rate and it shows the interest that you’ll pay when you borrow something. While APY is the interest that implies when you save money. For a clear payment of interest, one should explore all about APR vs APY.  

Whether you save money or borrow, you should learn the basic differences between the terms. Having a thorough understanding of these terminologies, you can decide how to manage your money. In the later section, we’ll discuss what is meant by APR, how it’s calculated, what is APY, and how it’s calculated. So, let’s move down to resolve your confusion. 

What is APR?

Annual Percentage Rate, abbreviated as APR, is the interest rate that implies whenever you borrow money. This money can be in any of the following forms. 

No matter you borrow money in which form out of the above all, the interest implied to that money will be measured in APR. The lower the APR on the lent money, the lesser amount you will be charged in the form of interest.

How to Calculate APR? 

It’s quite easy to calculate the credit card APR. Though it may vary from region to region, in most cases, APR is calculated by calculating the US prime rate. The prime rate refers to the interest that different companies impose to lend their products. When you’re imposed some additional fee or margin in addition to the prime rate, that amount is APR. 

The margin imposed on different credit cards may vary as per the type of the card or the policy of the relevant bank. Also, the prime rate may fluctuate. So, APR on the credit card may also vary depending upon the prime rate and the margin that the bank will take on the credit cards. 

Types of APR

Here are different types of APR that can be imposed on lent or borrowed money. 

  • Purchase APR

This is the interest implied to the purchases made by using credit cards. 

  • Cash Advance APR

Sometimes, you may need money but have no other way than to apply for the loan via your credit cards. This may differ based on the way you borrow money and the total amount borrowed. Moreover, this kind of APR is divided into further categories. Mostly, this one is higher than the purchase APRs. 

  • Penalty APR

The penalty APR is considered as the highest interest that a credit card user may pay on his card. Mostly, such APR is imposed when you violate any rule and regulation of the relevant credit card company. 

  • Promotional APR

Also known as introductory APR, promotional APR is the lowest interest that is usually imposed on special transactions, cash transfers, or cash withdrawals. 

What is APY?

Annual Percentage Yield (APY), also called Effective Annual Rate (EAR), is the interest that is imposed on the money that you save in any form. This may imply the money in any of the following forms. 

  • Saved on saving accounts
  • Saved on money market accounts
  • Certified of deposits

It means that the higher the APY will be, the more you will earn on the money saved in any of the above-mentioned accounts. However, the amount earned will depend on the money saved in your account. If you have a low amount, the APY will also be quite low, and vice versa. The APY also includes the compound interest imposed on the money you deposited in any of your beneficiary accounts. 

How to Calculate APY? 

It’s quite easy to calculate the APY if you know the period rate and the number of compounding periods. Here is how to do this. 

APY = (1 + r/n)n – 1

Here, ‘r’ is the stated annual interest rate and ‘n’ refers to the number of compounding periods in every year. 

What is the Difference? 

Here are the basic differences that we can conclude from the above discussion. APR Vs APY, here are the basic variations. 

APRAPY/EAR
APR is the measurement of the interest charged when money is borrowed. APG refers to the interest earned when money is saved in any of your credit accounts. 
APR is imposed on credit accounts. APY is imposed on the deposit accounts. 
The lower the APR will be, the lower interest you’ll pay on the borrowed money. The higher the APY will be, the more credit you’ll earn on the deposited money. 

How to Make Decisions About APR Vs APY? 

Sometimes, you may get confused by APR Vs APY. In such a condition, keep the following things in mind to conclude. 

  • What is Compound Rate? 

To judge APR Vs APY, the first thing you should notice is the compound rate. If the compound is frequent, you’ll earn more via APY, and APR will result in maximum cost. 

  • What About Fees and Fines? 

When deciding on your accounts by taking into account a comparison of APR vs APY, you should focus on the fees. Check out what fees and fines are going to be included in the APRs. All the APRs don’t include the same fees. So, all will not cost you the same. Similarly, all deposit accounts don’t include all the fees and fines in APY, so all don’t pay off equally. 

  • What About Rate Change? 

Soon after getting your loan from your credit accounts, there may be a change in interest rate. This may increase the APR. On the other hand, the APY will also be affected due to the change in interest rate. 

  • The niche of Your Account

All accounts don’t impose the same APR on all the transactions. So, confirm the APR as per the type of your account. This will help you decide the APR Vs APY. 

Having into account the above-mentioned tips, you can decide the APR and APY of your credit or deposit accounts. This will give you a better outlook of APR vs APY. 

FAQs

APR, the annual percentage rate, is the crypto investment rate that you get with simple interest. While APY, annual percentage yield, is the yield or profit based on the compound investment. 
If your current bank is offering a low APY and you notice that any other bank is giving more APY, it's good to switch the bank to earn more APY. 
Different fees, like discount points, broker fees, transaction charges, application and processing fees, government fees, and origination fees are usually included in APR.

For a new person, APY and APR may be the same. However, learning the difference between APR vs APY is very important. Having an understanding of both these interests, one may decide about his credits well. However, if all the points about these deposit and credit interests are not learned properly, it will cause different issues. A precise difference between both these terms is given in the above section. Use this data to decide about your account’s APR or APY.


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