What is the Difference Between APR and APY?
🆚 Go to Comparative Table 🆚The main difference between APR (Annual Percentage Rate) and APY (Annual Percentage Yield) lies in what they represent and how they affect borrowers and savers. Here are the key differences:
- APR represents the total yearly cost of borrowing money, expressed as a percentage of the principal loan amount. It includes the interest you pay on a loan and any fees associated with the loan. APR is used for credit accounts, such as credit cards, mortgages, car loans, and personal loans.
- APY refers to the total amount of money you earn on a savings account or other investment, taking into account compound interest. APY is used for deposit accounts, such as savings accounts, CDs, and money market accounts.
In summary:
- APR is associated with credit accounts and measures the interest charged on loans.
- APY is associated with deposit accounts and measures the interest earned on savings.
The more frequently the interest compounds, the greater the difference between APR and APY. It is essential to understand the difference between APR and APY when comparing loan offers or savings account options, as they can significantly impact your finances.
Comparative Table: APR vs APY
Here is a table comparing the differences between APR (Annual Percentage Rate) and APY (Annual Percentage Yield):
| Feature | APR | APY |
|---|---|---|
| Definition | APR represents the yearly rate charged for borrowing money, including fees, but not including compounding. APY refers to how much interest you earn on savings and takes into account compounding. | |
| Purpose | APR is used to determine the cost of borrowing, such as on loans or credit cards. APY is used to calculate how much you earn when saving or investing money. | |
| Compounding | APR does not take into consideration compounding. APY takes into consideration compounding. | |
| Use Cases | Installment loans, credit cards, lines of credit. Savings accounts, CDs, other interest-bearing accounts. |
In summary, APR is used to measure the interest paid on loans and other credit products, while APY is used to measure the interest earned on savings and investment products. The key difference between APR and APY is that APY takes into account compounding interest, while APR does not.
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