What is the differance between APR and APY?

Question

Can anybody tell me the diff bet them and explain them with examples? Thank You.

Answer 1

APR stands for Annual Percentage Rate. It is the interest rate reflecting the total yearly cost of the interest on a loan or credit, expressed in a percentage rate. You pay this

APY stands for Annual Percentage Yeild. This is the rate of return on an investment made in a one year period.

APR=You pay this
APY=You make this

Answer 2

First of all, they are both used in relation to investing. But only APR is used for lending.

APR-annual percentage rate. This is the actual rate that you are paid, in a CD or savings account for example.

APY-- annual percentage yield. This is what you yield, or actually get out of it as in the same example as APR.

Example: you get a 1 year CD with a 5% yield. The rate you are paid is actually 4.88%. The difference is the assumption of reinvestment. If you reinvest your monthly interest payments, you will yield 5% b/c the interest earns interest also. If you elect to not reinvest, you would at the end, get less (about $12 per $10k annually) than the person who does reinvest.

Real life example: I have I client that I put $15k into the above CD (the disclosure says 4.88%APR & 5% APY) the month of October they made $60.28 in interest. In November, they made $60.52! Where did the extra $.24 come from? Compounding the $60.28 that also earned interest. This month it will be slightly higher again, and so on until maturity. If they had taken the interest out monthly, the payout would never be more than $60.28.

Also, if you have a mortgage, dust off the settlement papers & look at the truth in lending disclosure. Toward the very end they give you a rate that is higher than your actual mortgage rate (for the life of me, I cant remember the exact name of what it is called. Help me out mortgage folks!) For example, if you have a 6.9% 30 year fixed mortgage, your paying rate should be roughly 7.4%. Because of compound interest & loan fees, they must be disclosed to you in this maner to show what you are actually paying. Look at it also from the banks side, they are yielding higher because of compounding that they recieve from you.

Answer 3

APR is the annual rate of interest without taking into account the compounding of interest within that year.

Alternatively, APY does take into account the effects of intra-year compounding. This seemingly subtle difference can have important implications for investors and borrowers.

For example, a credit card company might charge 1% interest each month; therefore the APR would equal 12% (1% x 12 months = 12%). This differs from APY, which takes into account compound interest. The APY for a 1% rate of interest compounded monthly would be [(1 + 0.01)^12 – 1= 12.68%] 12.68% a year. If you only carry a balance on your credit card for one month's period you will be charged the equivalent yearly rate of 12%. However if you carry that balance for the year, your effective interest rate becomes 12.68% as a result of the compounding each month.

Answer 4

APR (annual percentage rate) deals with loans. APY (annual percentage yield) deals with investments. They are basically the same number, but applied to different things.