To break it down, APY, or Annual Percentage Yield, is the interest you earn on money stored in a savings account, while APR, or Annual Percentage Rate, is the interest you owe when you borrow from the bank. It’s important to know the difference between these two key terms as they impact your finances, especially when investing or taking out a loan. APY and APR affect how your interest is ultimately calculated. Knowing the difference between APR and APY could help you earn more or owe less money.
APY “Annual Percentage Yield” is the annual rate of return — expressed as a percentage — that you get on your money once you factor in compound interest. Compound interest is interest you earn on both the principal dollar amount in your account — and the interest that’s already accumulated on the principal balance.
With each compounding period, you earn some interest on your money. All of this interest adds up based on your account’s APY rate. Keep in mind that the interest you could earn can vary based on how much you deposit into your account; how often and how much you contribute or take out; and what kind of account you open.
- deposit accounts
- investment products
- savings accounts
- certificates of deposit
- money market accounts
Banks use the deposits you make into these types of accounts to fund the loans they issue to other customers. To incentivize consumers to open these accounts, banks offer interest on your money at a specified rate, which is expressed as the account’s APY.
APR “Annual Percentage Rate” is the yearly interest, plus any applicable fees, a financial institution charges for lending you money. The APR is often higher than the stated interest rate for the loan since it includes these additional fees. APR is also expressed as a percentage.
- credit cards
- auto loans
- other consumer loans
The APR of a loan doesn’t typically include compound interest. But credit card issuers may use compound interest when calculating how much to charge you for using the credit they extend to you.
Educate yourself and know the details
Pay close attention to not only the interest rate and APR of your loan and/or credit card. A lower rate means lower costs over the life of the loan. Always read the fine print on your loan or credit card terms and ask questions if needed.
It’s the inverse with APY — the higher the rate, the greater the amount of interest your money could earn. If you’re choosing between interest-bearing accounts at different banks, look at this all-important number and whether the interest compounds daily, monthly or annually to determine how much you’ll earn on your deposits. From there, you can make the best decision about where to keep your money.
Thanks and credit goes to gobankingrates and creditkarma for this content.