Interest rates are often listed with both an APR and APY rate, what's the difference?
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APR is Annual Percentage Rate APY is Annual Percentage Yield The difference is the APR is a calculation of just the interest on the principal amount. The APY is the interest (plus the interest on the interest). Usually you will see debt offers (loans, credit cards, etc) in APR and savings offers (cds, savings/checking accounts) in APY because the APR is lower than the APY for the same interest rate. APR = period Rate * periods per year APY = (1 + period rate) ^ periods per year - 1 For example: if the period rate is 1% and they charge it every month the APR should be 12% (12 * .01) The APY would be ~12.7% The APY is more 'true' to what you are paying/getting. Another example: Using the same interest rate above, if you start with $100 after the first month you would have $101. The second month you have $102.01 because you also earned interest on the additional dollar that was in your account for the second month. Any loan you get will probably give you the APR (again because it looks lower), but the minimum payments will use the APY because you have to pay off the balance and all the interest earned throughout the given term period. |
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Are you sure you mean APY? APY stands for annual percentage yield and is normally associated with investments that pay interest such as CDs. APR is annual percentage rate and is the effective rate you pay after compounding is taken into account. The two terms are analogous but one refers to how much you pay in interest and the other to how much you earn. Usually loans have the Interest Rate and APR both listed. One is the interest rate they are charging the other is the effective rate after compounding and fees are taken into account. It is the APR you should take into account when comparing loans. |
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