APR and APY are two different ways to calculate interest rates. APR stands for annual percentage rate, while APY stands for annual percentage yield. However, they can be easily confused with one another because they’re so similar in name and function.
The main difference between APR and APY is how you calculate them, but there are other significant differences as well that you’ll explore below!
APR vs APY: What’s the difference?
The APR is the annual percentage rate that’s on your credit card statement. The APY is the effective interest rate you earn.
The APR is the annual percentage rate that’s on your credit card statement, which is what you’ll see in big bold letters when you get a bill from your bank or credit union. This number represents how much it costs to borrow money over time—the higher this number is, the more expensive it’ll be for you to carry debt on that credit card (or any other loan).
However, when determining what type of loan makes sense for you, it’s not just about APR: it’s also important to look at whether there are fees and other factors involved with the terms of each offer so that they work best for your situation.
The APY—annual percentage yield—is an online term used by banks and financial institutions where consumers can find out exactly how much interest they’re earning per year on their deposits with them. It can also be found by performing complex math calculations involving compound interest over time (not recommended!).
Since banks don’t typically list these values anywhere publicly (which makes sense since they want people using less than all possible information), most people have no idea how much money they’re really making off their accounts until someone else tells them or they do some digging themselves.
This is why it’s important for consumers to be savvy about their finances: if you don’t know what interest rates are, how much money you’re earning from them (and at what point), or what APR means, then it’s more difficult to make informed decisions about where your money goes.
How to calculate APR
Now the question is how to calculate APR?
APR stands for Annual Percentage Rate, which is the cost of borrowing money expressed as an annual rate. It includes interest, fees and other charges.
The formula to calculate APR is:
APR = [(P x J) + (F x T)] / 12
Where P is the principal amount, J is the number of months in a year that payments are made, F is the number of payments made per year and T is the total number of payments.
Like Lantern by SoFi, “Some lenders may provide an auto loan calculator to crunch the numbers for you.”
How to calculate APY
APR stands for Annual Percentage Rate, while APY is the interest rate you earn on an annual basis. The following formula is used to calculate APY:
APYR = APR x Number of Compounding Periods in a Year
For example, if you deposit $1,000 into a savings account with an APR of 2% and you want to know what your balance will be after one year if the interest compounds once per year, then the equation would look like this:
APYR = 2% x 1 = 2% (1+1) = 2.02
APR and APY are two different ways to measure the interest you earn on your savings, but they can be confusing. The good news is that both of these methods are simple once you understand how they work.