Banks and other financial institutions will usually show the APR for a loan or credit card. For savings accounts and CDs, the banks will usually show the APY. Why the difference? The reason is that the APR rate is a lower percentage than the APY rate. A lower percentage rate looks better for loans, whereas a higher percentage rate looks better for a savings account.
What is an APR Rate?
APR or annual percentage rate is listed as the actual rate in a 12 month period. For example, if a loan for $10,000 has an annual percentage rate of 12%, the interest in a 12-month period would be $1,200. The only problem is that many loans, especially credit cards, are calculated monthly and not annually. With a percentage rate that’s calculated monthly, the actual interest rate paid annually is more than the stated APR. This is where the APY comes into play.
What is APY Interest vs. APR interest?
APY or annual percentage yield is the actual amount, expressed as a percentage. Annual percentage yield takes into account the compounded interest. The annual percentage rate does not take compounded interest into account. APR is the rate not the actual dollar amount of interest.
Example of How APY Interest is Calculated
In the above example, the APR interest of 12% on $10,000 equaled $1,200. Using the same example of 12% and $10,000, see how annual percentage yield is figured compounded monthly for a 12-month period. In order to figure the monthly compounded interest the APR would be divided into 12 (months). Using the 12% example, the monthly interest would be 1%.
- Month 01 - 1% of $10,000.00 = $100.00 interest
- Month 02 - 1% of $10,100.00 = $101.00 interest
- Month 03 - 1% of $10,201.00 = $102.01 interest
- Month 04 - 1% of $10,303.01 = $103.03 interest
- Month 05 - 1% of $10,406.04 = $104.06 interest
- Month 06 - 1% of $10,510.10 = $105.10 interest
- Month 07 - 1% of $10,615.20 = $106.15 interest
- Month 08 - 1% of $10,721.35 = $107.21 interest
- Month 09 - 1% of $10,828.56 = $108.29 interest
- Month 10 - 1% of $10,937.85 = $109.38 interest
- Month 11 - 1% of $11,047.23 = $110.47 interest
- Month 12 - 1% of $11,157.70 = $111.58 interest
Adding all the interest in a 12-month period comes out to $1,268.28 or 12.68% for APY interest compared to $1,200 or 12.00% for APR interest.
This is a very simplistic example. In actuality, as monthly payments are made on a credit car or other loan, the interest amounts will change. It’s important to understand if a credit card is listed at 12% APR, the actual amount of interest that’s paid will be higher than the stated interest rate. When shopping for the lowest rates on a loan or the highest rates on a CD, always compare apples to apples or rates to rates and yields to yields.
James Clausen - Clausen received a Bachelors Degree in Business Administration in Automotive Management and Marketing at Northwood University, graduating ...
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