What are the main Difference between APY & APR

It is always good to know about basic financial terms to avoid confusion as well as be better informed. So, let us take a look at APY and APR and the difference.

What is APY?

APY is defined as the Annual Percentage Yield. This is the rate your money earns interest by leaving it in an account. This is the annual rate of return on your investment. The higher the APY the better. Why? Because the higher the APY, the more interest your money makes, and this means more money in your pocket. 

Unfortunately, a high APY for a bank or savings and loan savings account is less than 1% right now which is poor. Investing more money in higher yield accounts makes a lot of sense as long as you have a safety cushion in your savings account. 

What types of accounts have APY?

The most common kinds of accounts with APYs are savings accounts, CDs (also called certificates of deposit), and investment accounts. Most people try to move as much cash as they can into investment accounts as their yields are so much higher than CDs and any savings account.

The APY rate shows the total amount of interest (in percentage form) you earn from your account in a year. When you make deposits and leave your money in the account, the interest will help your money grow. You also get the effect of compounding, or interest earning on interest. As you get interest you then get interest on your gained interest as well, thus, compounding interest.

What is APR?

APR is the Annual Percentage Rate. This is the simple interest rate charged for the year for the period of a loan. This means interest is calculated on the principal loan amount and there could include additional costs, insurance, or fees to generate the amount of interest charges you will be responsible to pay. Low APR = great! The lower the APR, the less interest you will have to pay on a loan. The higher the APR, the more interest you have to pay. That is why your APR for a credit card is so important. Some cards today charge 20-30% interest which can add enormous expense over and above any charges you have on the card. Typically to get lower APRs on a credit card, auto loan, etc. you need higher credit scores.

Many states and agencies refer to APRs for payday loans. But payday loans really are not oriented to APR. Why, because they are not annual or long term loans. In fact, they are usually 1 month or less in length. That is why they are often called fee-based loans because lenders state the exact fees they will charge for the loan in advance. And most states highly regulate the fee amounts. In any case, you know exactly what you will pay back before you accept the loan. Payday loan interest is of no consequence if you pay the loan off when it is due.

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