Home Banking What is the Difference Between APR and APY? – MyFinanceInsurance

What is the Difference Between APR and APY? – MyFinanceInsurance

by Shagun Saini
What is the difference between APR and APY

Let us study what is the difference between APR and APY? As, we know these 2 are types of interest and knowing the calculation of the same is important to know your saving, investment interest or how much interest you will be paying on to the amount of loan you have taken.

But before we study what is the difference between APR and APY? We should first know what does APR as well as APY mean?

What is APR?

APR refers to the Annual Percentage Rate which is used to calculate the interest on the loan, mortgage, credit card, or another loan where it is calculated by multiplying the number of periods each year with the periodic rate. Therefore, APR can be quoted in the form of the equation as:

APR = periodic interest rate x total number of periods

While making a calculation of APR the compounding of interest is not taken into consideration. So, APR shows up the simple interest rate within a period of one year.

For More Infomation Visit MyFinanceInsurance.

What is APY?

APY refers to the Annualized Percentage Yield, which is used in calculating interest or interest paid in savings, checking, or another interest-bearing account. It shows interest paid on interest and therefore, APY is higher as compared to APR as it is interest paid on an interest which is compounded quarterly, monthly, or daily.

So, the interest you get is added into your account and you earn higher interest on that amount. So, you earn an amount of interest on the total amount at the end of each month unless you withdraw some amount.

While making the calculation of APY compounding of the amount is done, using the following APY formula as:

  • APY = (1 + periodic interest rate) ^ (total number of periods) – 1

OR

  • APY = ( 1 + r / n ) n – 1

Where in the above APY formula,

  • r = the annual interest rate, and
  • n = number of times interest compounded in a year

What is the Difference Between APR and APY?

apr vs apy calculator

APR is the simple annual rate of interest that is paid on an investment, whereas APY takes into account the frequency of applying the interest too. So, the yearly interest, with applicable fees is APR, which tends to be higher than the stated rate of interest as additional fees is also included in it. Now we knew about What is the difference between APR and APY? In the below table we can see the calculation difference.

Though, APR of a loan does not include compound interest.

Difference Between APR and APY Calculation:

Here we will study the effect of compounding on the APY of a loan, where we are given with APR of 10.00 %.

CompoundedAPRAPY
Yearly (1)10.00 %10.00 %
Semi-Annually (2)10.00 %10.25 %
Quarterly (4)10.00 %10.38 %
Monthly (12)10.00 %10.47 %

As, APR is the simple interest it remains the same over the year or when calculated semi-annually, or quarterly or on monthly basis. While we see differences in APY rates, that will affect your loan amount.

APY Calculator:

You can use the APY calculator for calculating the amount of APY interest as by using the calculator your time will be saved. So, you can use APY calculator online for calculating the APY.

APR Calculator:

You can use the APR calculator for calculating the amount of APR APY interest as by using the calculator your time will be saved. So, you can use APR calculator online for calculating the APR.

APR VS APY Calculator:

You can use the APR VS APY calculator for calculating the amount of APY as well as the APR interest in which you can convert the APR interest to APY interest and vice versa which is compounded on  monthly, annually, semi annually, or daily basis.

Frequently Asked Questions

  • What is better APR or APY?

APY is considered much valuable and better as it tells us the actual amount that you will earn on your saving or investments or the amount you owe. Although, in case of savings and investments APY may seem to be good. But in case of loan and mortgages interest on interest is calculated which will lead to a higher value with APY than APR. So, APY is higher than APR.

  • How does APY differ from interest rate?

The APY tells us the total amount of interest that you will be earning in a particular year with account frequency of compounding interest. Whereas, the APR does not tell us the frequency of compounding interest.

  • What is 5.00% APY mean?

A 5 % of APY tells you that while compounding interest monthly, you will have an APY of 5.12 %.

Conclusion:

Understanding of APR and APY is important to know how the interest rates are calculated and how much you will be paying as interest on the loan amount as well as your earnings of interest on investments. As, APR refers to the Annual Percentage Rate which is used to calculate the interest on loan, mortgage, credit card or other loan where it is calculated by multiplying the number of periods in each year with the periodic rate. And on the other hand, APY refers to the Annualized Percentage Yield, which is used in calculating interest or interest paid in a savings, checking, or other interest bearing account. So, now we know what is the difference between APR and APY?

related posts

Leave a Comment