Know the Difference Between APR and APY
Interest can build up quickly. So when you go into business or save money, you want to know what your interest rate is. The problem is that there are APR and APY. They are different animals, and many people do not see the difference.
It is important to understand how these terms work so that you know what you are getting yourself into.
The Annual Percentage Rate (APR) is simply the interest rate calculated as the annual rate; it is the interest rate multiplied by the number of periods in the year. Thus, if the monthly interest rate on your credit card is 1%, your annual interest rate should be 12%. The annual interest rate is usually associated with borrowing money or using a credit card. When dealing with a mortgage, the annual interest rate also includes any fees associated with the loan, whereas the simple interest rate does not include these fees.
The Annual Percentage Yield (APY) is the rate of return on the compounding interest rate. Compound interest is interest earned on top of the previous principal and interest. We have explained this in more detail , but these are mainly percentages derived from previous percentages.
APY is associated with savings. It takes the interest rate and takes into account how often interest is charged throughout the year to get the interest. Ellie shows how it works:
APY = (1 + Periodic rate as decimal) Number of periods per year – 1
So, let’s see how the periodic rate calculated for the year versus the monthly rate affects the AP when the periodic rate (again, usually expressed simply as a “rate”) is 1.32%:
1.32% rate stacked once: (1 + 0.0132) 1-1 = 0.0132 or 1.32% APY If your initial deposit were $ 1,000, you would have $ 1,013.20 in a year USA. The daily rate of 1.32% is compound: (1 + 0.0011) 365 -1 = 0.01329 or 1.329 % per annum. If your initial deposit was $ 1,000, you would have $ 1,013.29 in a year.
Basically, APY shows how much you will earn as interest accrued over the course of the year. The annual percentage rate shows how much interest you pay annually on a loan or revolving loan. When you are comparing loans, credit card offers, or savings accounts, it is important to make sure you are comparing apples to apples.
Update : We have corrected the article to clarify the original information from Investopedia. Thanks to the reader FinanceGuy44 for bringing this to our attention.
APR and APY: Why Your Bank Hopes You Won’t Know the Difference | Investopedia