You've probably heard these acronyms plenty of times in your life. But, do you know exactly what they mean? Here's a simple guide to understand the difference between the APY and APR.
If you are opening or reviewing an existing financial account, you've probably come across the terms Annual Percentage Yield (APY) or Annual Percentage Rate (APR) and ended up a bit confused.
A simple way to identify both of these acronyms is by remembering that APY refers to what you earn on the cash you've got in a savings account and the APR is what you owe when you borrow money.
Still confused? Here's a guide to understand the main differences.
Definition of an APY
The APY is the accumulated amount of interest you can earn each year on a deposit account. Banks can act as borrowers in savings accounts, money market accounts or certificates of deposit (CDs), and will then pay you interest for being their lender.
The annual percentage yield is based on the interest rate of the account and how often the interest compounds. Actually, the last factor is one of the main differences with an APR, as it only shows annual interest on an account and isn't based on the interest compounds.
Some deposit accounts have daily interest compounds, which means it gets added to your account one day and on the next day the interest rate is applied on your new balance. Other counts may compound monthly, quarterly or annually.
Definition of an APR
The Annual Percentage Rate refers to the total amount of annual interest you will pay on an installment loan or revolving line of credit. This rate will be mainly associated with credit cards, store cards, loans (home, personal, students, etc) and lines of credit (like HELOCs).
Besides considering interest rate, APRs may include lender's added fees, points or other costs associated with credit. Usually, a loan with higher fees but lower interest rates can have a higher APR than one that offers lower fees and higher interest rates.