# APR Vs. APY

Knowing the difference between APR and APY is useful in many ways while borrowing or saving money in banks. Read the article which discusses the distinction between them in detail, to help you understand the importance of each of these financial terms.

Suketu Mehta

*Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it.*

― Albert Einstein

Annual Percentage Rate

APR is the term used to define the interest paid on credit card, mortgage or any other type of loan. It is applicable to any interest rate and is either equal to or lesser than APY. It is simple to calculate as it does not involve any complex calculations because the rate is directly employed on the money borrowed. In case the APR for your credit card is 15%, it is applied by the credit card company, everyday, on your average credit card balance, post the grace period. On looking at the credit card statement, you will notice that the 15% is divided by 365 (days in a year), which brings the daily periodic rate to 0.04109%. Thus, if you are paying off the total balance amount every month, after the 15% interest rate is applied, then you pay less compared to what you would be paying if you carry forward your balance to the next month.

Annual Percentage Yield

APY is a term used to define the interest paid in a checking, savings or any other type of interest-assuming account. Since APY also accounts for interest paid on the initial interest amount, it is always more than APR. This interest is compounded, either on a daily, monthly, or quarterly basis, this interest is added to your average daily balance. The next time when APY is calculated, the previous amount is already added to the balance and hence a higher figure derived. Thus, except when you withdraw from an interest-bearing account, your interest deposits will always be more than what was calculated the previous time.

An Example of Comparison

To help you get a better picture of the debate, let us look at an example. Assume that you have a savings account which pays you interest at the rate of 3% annually. You deposit USD 5000 in this account. On dividing 3% by 12 months, you get a monthly interest rate of 0.25%. But when you calculate interest on the amount for a year on the 5000 dollars, by applying the interest rate only once, you will get the annual interest as USD 150. However, a monthly calculation of the interest rate at 0.25% per month would give you a much higher interest on the 5000 dollars you have in the account.

You can therefore see that the interest calculated through APY is USD 152.08 and not USD 150, as calculated through APR. Another important point is that more times the APY is calculated, higher your interest gain will be. In this case it is calculated on a monthly basis and hence, the amount will be more than what you would have arrived at by calculating the interest quarterly.

Month |
Amount |

1 | 5,012.50 |

2 | 5,025.03 |

3 | 5,037.59 |

4 | 5,050.19 |

5 | 5,062.81 |

6 | 5,075.47 |

7 | 5,088.16 |

8 | 5,110.88 |

9 | 5,113.63 |

10 | 5,126.42 |

11 | 5,139.23 |

12 | 5,152.08 |

You can therefore see that the interest calculated through APY is USD 152.08 and not USD 150, as calculated through APR. Another important point is that more times the APY is calculated, higher your interest gain will be. In this case it is calculated on a monthly basis and hence, the amount will be more than what you would have arrived at by calculating the interest quarterly.

From the Borrower's and Lender's Perspective

When you are the borrower, you are looking for the lowest possible interest rate, as you will be paying back the borrowed amount with interest. In such a case, it is important to know what the difference between them is, so that you do not end up paying a lot of interest.

**Disclaimer**:

*This article is for reference purposes only and does not directly recommend any specific financial course of action.*