When it comes to finances, knowing the difference between APR vs APY is very important. These two rates are very different, and will play a major role if you are borrowing money or making an investment.
If you are wondering what the difference between APR vs APY is, keep reading to learn everything you need to know.
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Difference Between APR and APY
Although APR and APY are used to describe the interest rate charged on a loan or paid on an investment, there is one major difference between the two. APR is the yearly rate without taking compound interest into account. On the other hand, APY is the effective annual rate and includes how often interest is applied to your balance.
Be sure to note that the goal with savings is to get the highest APY. However, when you’re borrowing, you should look for the opposite. You want to get the lowest APR to keep the amount of interest you pay at a minimum.
How Financial Products Are Marketed
When an investment is being marketed, it’s often in APY because it makes the amount of interest you earn look higher. For that reason, you’ll see APYs quoted for the following financial products:
- CDs
- Savings and checking accounts
- IRAs
However when you borrow money, the lender usually displays the interest you’re charged in APR. This is because the APR makes it seem as though you’re not being charged as much interest. Loans commonly promoted with APRs include:
- Private student loans
- Student loan refinancing
- Personal, home and auto loans
- Credit cards
Using online calculators can be useful to determine the difference between APR vs APY, which will show you the true cost of interest. For instance, if a loan or investment lists an annual interest rate in the form of APR, you can convert it to APY to see how much interest you’d actually earn or pay.
Make Sure You Compare the Same Rates
When you want to invest or borrow, it is important that you compare the same rates because there are big differences between APR vs APY. This can make it hard to compare loan and investment products if their rates are expressed in different ways.
As a general guideline, you should use the APR to compare loans or credit cards and APY to compare savings products. When you do this, you create a level playing field so that you can assess the pros or cons of one credit card or savings account against another.
Author’s Verdict
Now that you know the difference between APR vs APY, you can be smarter and more informed about your finances. Additionally, be sure to take into account the tips we offered to make sure you’re getting the best options available.
In addition, we have a list of bank promotions to get some extra cash in your pockets today. You may also want to check out savings accounts if you want to get started on saving up money.
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