What is APR vs. APY?
APR vs. APY –
Sometimes you earn, and sometimes you owe – to make the most of your hard-earned dollars, it's essential to know the financial terms impacting your bottom line. Let's review.
- Annual percentage rate (APR) measures the yearly interest you pay on what you've borrowed.
You've likely seen the acronym APR when shopping for a credit card, mortgage, car loan, or personal loan. Oftentimes that can even be your deciding factor. APR stands for Annual Percentage Rate, and it measures the amount of interest you'll be charged when you borrow. When you charge something on your credit card, for example, at the end of your billing cycle, you must pay off everything you borrowed. If you don't pay the required amount, you will be charged interest on the remaining balance at whatever the agreed-upon percentage rate is – this is your APR.
Loans generally come with fixed or variable APRs, a fixed APR is a rate that will not change while you have the loan or credit, but a variable APR can change at anytime your loan is active. A borrower, like an owner of a credit card, can prevent having high APR charges by making sure they have a good to excellent credit score; the higher the score, the lower the APR, typically.
- Annual percentage yield (APY) measures the annual amount of interest you earn when you save.
When choosing a savings account, you'll often see the acronym APY, and this number can help you decide where to deposit your money. APY stands for Annual Percentage Yield. This is the real rate of return on your deposit or investment, considering compounding interest. Essentially, it is the annual interest you earn on what you save. Compounding interest is calculated periodically, with the amount being added to the balance. When looking for a savings account, it's beneficial to look for an account offering a high APY. For example, if you save $1,000 for a year at .01% APY, you will end up with 1,000.10; but if you save $1,000 with higher APY, you can earn up to a few dollars a year.
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