APY vs APR: What’s the Difference?

3 min read

The cost of borrowing money can be confusing. There are so many different loan terms and conditions that it’s easy to get confused about what you’ll actually be paying. It’s not just the interest rate that determines how much a loan will end up costing you. You need to look at both the annual percentage rate (APR) and the annual percentage yield (APY) to know exactly what your costs will be. Both of these measurements reveal different things about a loan, so it’s important to understand how they impact your finances. Read on for details about the difference between APR and APY when considering a loan offer.

What is APR?

APR stands for annual percentage rate. This is the primary term used to describe the cost of a loan. It’s calculated by taking the total price of the loan and dividing it by the number of payments you’ll make. So if you borrow $20,000 at a 10% annual percentage rate, you’ll make 10 monthly payments of $1,000 (the total amount of the loan divided by the number of payments). APR is the standard way to compare interest rates from different lenders. Since it accounts for all fees and charges, it offers a fair comparison between different offers and situations. Note that the APR rate is different from the annual payment yield (APY), which is a measurement of the true cost of a loan. The APR only takes into account the interest rate, but the APY takes additional fees (like closing costs) into account.

What is APY?

APY stands for annual percentage yield. This term is often used when you’re comparing investment products. When it comes to loans, APY is a measurement of the true cost of a loan, rather than just the interest rate. APY will take into account closing costs and other fees, which are often not part of the APR calculation. The APY is calculated by adding up the total cost of the loan (including all fees and charges) and dividing it by the number of payments you’ll make. So if you borrow $20,000 at a 10% annual percentage yield, with $1,000 in loan fees, you’ll make 10 monthly payments of $2,000 (the total cost of the loan, including fees, divided by the number of payments). The APY is often used to compare different types of loans. For example, if you have a choice between a standard mortgage loan and an equity line of credit, the APY can help you decide which one is the better deal.

APR vs. APY: Which is more important?

As we’ve seen, APR and APY are different ways of measuring the cost of a loan. However, while they both provide important information, they do so in slightly different ways. The APR is the cost of the loan stated as a simple number. It’s good for getting a general idea of what your loan will cost, but it doesn’t include other additional fees (like closing costs). APY, on the other hand, takes these additional charges into account. This makes the APY a more accurate way of assessing the overall cost of the loan. However, while the APY is definitely more thorough, you can generally get a good idea of what the cost of the loan will be by looking at the APR alone. While you’ll want to make sure the APR includes all applicable fees, it’s still a better way of comparing different loan offers than the APY.

How APR affects your loan costs

The APR is the interest rate you’ll pay on your loan. The APR will be in your loan offer, and it’ll be the same for everyone who has the same loan. Since the APR is the same for everyone, it’s easy to compare loan offers and see which one will be cheaper. While the APR is important, it can’t tell you the exact cost of your loan. The rate of interest you pay is also determined by the term of the loan. A $20,000 loan with a 10% APR has a different cost than a $20,000 loan with a 10% APR that’s paid off over 5 years. You can get a general idea of how much a loan will cost by using the APR as a measuring stick. However, you can’t be certain of the exact cost until you know the term of the loan.

How APY affects your loan costs

The APY is the true cost of the loan. It includes all fees and charges, so it’s a good way of comparing loans that have different rates. For example, you might have two different loan offers. One is at a 10% APR, and the other has a 20% APR. Since the fees and charges vary between the two, it’s difficult to say which one is the better deal. However, if you know the APY for each one, you can compare them properly and see which one is cheaper. You can’t use the APR to compare two loan offers with different rates. The APR is a standard measurement that’s the same for every loan offer. While you can use the APY to compare loans with different rates, it’s not as straightforward as using the APR. You’ll need to know the total cost of each loan and do some simple math to find out which one is cheaper.

Bottom line

The main difference between the APR and APY is that the APY takes all fees and charges into account, while the APR doesn’t. The APR is the interest rate and how many payments you’ll make with a loan. The APY is the true cost of the loan and includes all fees and charges. APR is a good way to compare loan offers, but it doesn’t take all relevant charges into account. APY is a more thorough way of assessing the overall cost of a loan and comparing loans with different rates and terms. While APR and APY are both helpful ways of comparing loan offers, they measure different things. APR is the interest rate and how many payments you’ll make, while APY is the true cost of the loan and includes all fees and charges.

Kelroy James Kelroy James is a Supply Chain, Logistics & Operations Management professional with extensive expertise in successfully delivering organisational change, building quality working relationships with key customers and adept at working effectively to achieve goals both as a cross-functional team member and individual contributor. He is a Percy Hobart Innovation Fellow in the Royal Navy, DeFi Talent with Frankfurt School Blockchain Center, graduate of Aston University with a BSc (Hons) in Logistics and Operations Management, and recently completed a Micro Masters In Predictive Analytics using Python with the University of Edinburgh. With a keen interest in driving organisational improvements, he creates value for stakeholders by designing and implementing processes that integrate strategy, technology, and people.

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