The Difference Between APY and APR
Sometimes you’ll see an interest rate followed by an APY. Sometimes you’ll see an interest rate followed by an APR. While the two look very similar, the two are actually very very different.
APY stands for Annual Percentage Yield and APR stands for Annual Percentage Rate. Again, they sound similar but they are very different.
APR is the annual interest rate without any consideration of compounding interest within that year. You calculate it simply by multiplying the periodic rate by the number of periods within a year. The periodic rate is simply how much interest is accrued per period on the funds.
APY is the annual interest rate with consideration of compounding interest within that year. You add one to the periodic rate to the power of the number of periods, then cut out the one.
A periodic rate of 1% with 12 periods works out to be:
- APR of 12% = 1% x 12;
- APY of 12.68% = (1.01^12)-1
Usually banks will say APY for the interest on a bank account, because it’s a bigger number, and then APR on loans, because it’s a smaller number. Clever huh?