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APY Vs. APR : A Confusing Debate

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Corie Wilson

What if someone tells you that to secure your financial future you need to understand the mathematical distinction between APR and APY. If you are someone who panics upon hearing such big words, then this blog is what you need to read.

We will try to make it easier for you so you can comprehend it. So, let’s begin with the abbreviation and know what they mean.

APR: Annual percentage rate

APY: annual percentage yieldAPY Explained

 

The amount of interest that is earned on the deposit amount in your account over the year is known referred to as APY. APY is only applicable on the amount that you haven’t withdrew nor added in a year. It is generally associated with the following:

  • Money market accounts
  • Saving accounts
  • Certificates of deposits

APR Explained

The yearly rate of interest on the borrowed or earning money is APY. To put it simply, if you have borrowed1000 a year and you are being charged 1%, then your APY would be 12%. 1% twelve times a year makes it 12%, simple! It is usually associated with the following:

  • Lines of credit
  • Store cards
  • Credit cards
  • loans

How These Two Can Be Used Against You?

If you are new to loans or you are someone who doesn’t go into the depth of things, the chances are you will end up in loss. Most lenders try to give APR; when you take the loan, the agenda behind it is simple. APR number doesn’t give you the detailed information. Whereas, when you are earning interest, they give you APY so, the amount of interest seems higher. If you know the difference, you will be able to save thousands or more over time.

Compare Apples To Apples

When you are interested in investing in the money market or certificate of deposits, make sure you are comparing the right way. You should compare APR to APR and APY to APY instead of blending the two and getting confused.

If you compare one account’s APR with the APY of another, you will end up getting it all wrong. The numbers would not reflect the actual result, and it will stay ambiguous which account is better among the two. However, if you compare the APY of both, you will get a clearer picture as to which account is going to yield more interest over time.

If you are relying on online banks, then always make sure to check what traditional credit unions and brick and mortar banks are offering. Online banks have low overhead costs, which enables them to offer higher APY on deposit accounts. You can only reap all the benefits if you are on top of things and know stuff.  

Bottom Line

Now that you have come to towards the end of this blog, we are pretty sure you have a basic idea about APY Vs. APR debate. You know the difference between the two and can make financial decisions based on this understanding. Next time you are getting a credit card or applying for a loan and your lender gives you APR, you will finally have the upper hand, and you can ask when it is compounded or what the APY is.

It is easy to get confused and overwhelmed in the financial world. However, understanding APY and APR can make you an informed consumer when it comes to making financial decisions. You should always research the terms thrown at you if you want to make deals that benefit you in the end.

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Corie Wilson
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