Annual Percentage Yield (APY) vs Annual Percentage Rate (APR)
19 July 2022
4 Mins Read
toc impalement
The full form of API is Annual Percentage Yield refers to the amount of interest that you have earned on your savings, including compound interest, over a specific period of time.
APY is often confused with a similar measurement called Annual Percentage Rate (APR), which is an interest rate on your account alongside any additional fees that you need to pay.
It’s easy to see why people often get these two terms mixed up because they are both related to the amount of interest that you’re earning or paying over a period of time for an investment or asset. They are both measured over the course of a single year.
Despite sounding very similar, there are key differences between APY and APR. Let’s cover each one in more detail and the key differences between them.
Let’s start with what is an annual percentage yield?
What Is APY?
Many investors search for options with great annual percentage yields and APYs when trying to diversify their investment portfolio. The greater the APY, the more they will earn over the investment period on their deposits, savings, and retirement accounts. Unlike APR, APY includes compound interest.
The following formula can be used to calculate APY:
APY = (1 + Periodic Rate)Number of periods – 1 In word format, to calculate APY, you need to add 1 + the periodic rate as a decimal number. You then multiply the answer by the number of periods that the rate is applied. Finally, you subtract 1 from the answer to get your APY figure.
APY can quickly get complicated when you’re working with vastly varying numbers. Most companies and investors use an APY calculator to avoid figuring out the numbers by themselves.
Online APY calculators make it easy to determine your compounding interest and earnings over a set investment period. They’re error-free and easy to use and can save you a lot of time and energy.
What Is APR?
APR doesn’t take into account compounding interest. You can also use online calculators to help you determine your APR, but if you’d rather crunch the numbers yourself, you can use this formula:
APR = Periodic Rate x Number of Periods in a Year So, you need to multiply the periodic interest rate by the number of periods that this interest is being applied in a year.
Typically, banks and financial institutions use APR more than APY because it represents an interest rate that is for the borrower will be charged over a year.
For example, if somebody is borrowing $1,000 at an APR of 20%, they will be charged an extra $200 in interest over the course of the year. Most lenders will offer borrowers the option to pay the interest on a monthly basis to make it easier to pay back.
Because APR is the total amount that you will be charged over the year, you want this to be as low as possible if you plan on borrowing a significant amount of money.
On the other hand, you want your annual percentage yield to be as high as possible, as this represents the amount of money that you can gain from your initial investment.
Let’s have a look at the difference between the APY And APR
APR Vs API
Now, you know what are the definitions of the formula of the annual percentage yield and annual percentage rates. Now let’s have a look at the difference between these two percentage rates.
| APR | APY |
| APR calculates the interest charged to the individuals. | APY estimates the interest which is earned by the users. |
| APRs are associated with credit loans. | APY is part of the deposit accounts. |
| APR on your account means lowering your overall cost of borrowing. | Higher APY means your earnings will be much higher. |
These are the differences between the APR and APY. Maybe these two are associated with credit loans, but the overall functions of the APR and APY are entirely different.
Wrapping It Up:
The annual percentage yield and the annual percentage rates both are the most integrated parts of credit loans. But the functions and the overall activities are entirely different. Do you know what are the formulas for determining the exact values? So what is your opinion? Are we missing some of the points related to the calculation parts? Then share your opinion through the comment sections.
Additionals:
Related Articles
Comments Are Closed For This Article