Welcome to professrsavings.com, we teach finance basics. Today we will teach you the difference between apr versus apy in two minutes.
APR or Annual Percentage Rate and APY, Annual Percentage Yield are two terms you’ll want to know when you barrow money.
Let’s say Jane here may come across these terms when she applies for a new credit card or taking out a car loan on that sports car. Both terms are expressed as percentages, but wait a long minute. These two numbers mean completely different things and of course are calculated differently.
The major difference between APR and APY is that APY accounts for the effect of compound interest while APR is based simple interest.
Don’t worry. I will give you an example in a bit.
For example, when taking on a mortgage, if the APR is 10%, the APY or the interest rate you really pay would be estimated at more than 10% because APY is reflects interest paid on interest. Your mortgage interest compounds monthly. The difference seems small, it is significant over the length of a 15- or 30-year mortgage.
In comparison a credit card that charges an APR of 5%would have an APY more than 5% since again reflects interest paid on interest. The interest compounds monthly.
If you carry a balance on your credit card and you’re looking at APR instead of APY, then you’ll pay significantly more interest than expected. Let’s keep it smart and simple.
Thus consumers should focus on choosing apr, not APY when borrowing money.