APR vs APY–What’s the Difference?
Whether you’re saving money or borrowing it, you’ll probably hear the terms APR and APY. While they have some similarities, they apply to very different things.
APY is annual percentage yield and refers to the amount you’ll earn on money that you save or invest over time. It includes compounding, which periodically adds the interest you earn into the amount on which future interest is calculated. The more frequent the compounding, the faster you’ll earn money. Interest can compound daily, monthly, or annually. The higher the APY, the better for you.
APR is an annual percentage rate. It applies to borrowing money, whether it’s a loan or credit card balance. The APR reflects the basic interest rate on the loan, plus additional repayment costs to you, such as certain fees. The APR tells you how much you’ll pay to borrow the money, figured across an entire year. This gives you a more complete picture of what you’ll end up paying over the life of the loan. The higher the APR, the more you’ll have to pay in interest.
So, if you’re comparing savings accounts or investment vehicles, you’ll want to compare the APY. This will tell you which type will help you earn the most amount of money.
If you’re planning to take out a loan or comparing credit cards, you’ll want to look closely at the APR to find the best rate for your needs.
While this can be confusing, you can find calculators online that will show you how interest rates and compounding affect your money to help you make the best choice.
If you want to learn more about the terms APR and APY reach out to our branch managers today!