APR vs APY – Difference and Comparison

What is APR? 

One of the most commonly used acronyms is APR (Annual Percentage Rate), and it stands for Annual Percentage Rate. Interest will accrue on loans made by individuals or on money borrowed from others, and it will be calculated by the amount borrowed. The annual percentage rate (APR) assists in determining the total interest price for the borrowed money over the year, which is more straightforward than calculating every month. By the interests, APR might be both nominal and effective. The APR will be credited following the agreed terms between the investor and the borrower. As opposed to monthly fees, it is assessed on an annual basis. The Annual Percentage Rate (APR) was used to compute the interest rates for various types of loans, as shown below. The following is the aphorism utilized to calculate the Annual Percentage Rate (APR):

APR =[(F+I)/P]/n *365*100 where F+I = [(F+I)/P] and P = [(F+I)/P]

Fees are denoted by the letter F.

I = interest paid on loan based on the terms of the contract

P stands for Principal.

N denotes the length of the loan in terms of days.

An individual can compute the monthly interest mainly by adding the annual percentage rate (APR). Some of the components of APR are as follows:

  • The interest rate is calculated as follows:
  • The loan‘s interest rate
  • Fees or a monetary amount

Consequently, an individual should pay interest based on the present elements. When comparing the APR with the APY, it is clear that an individual does not have an undivided interest in either. It will be convenient for all borrowers because they can calculate their returns without unintentionally paying anything.

What is APY? 

An individual’s APY is a way of determining how much money they’ve earned due to their investments. APY, or Annual Percentage Yield, is a way for investors to make money by putting their money in an account and reaping the rewards. A year’s worth of data is used instead of a month’s worth. An investor with a vast investment can earn a substantial return on their speculative endeavors; therefore, the sum will rise in direct proportion to it.

The annual percentage yield (APY) is a valuable tool for determining how much money invested in an account over a year will earn. However, a person’s monthly profit can be calculated simply by knowing the annual interest percentage.

In this case, APY=(1+r/n) n-1

Rate of return = r / a.

In each year, n Equals the number of compounding intervals

As a result of the compounding effect, APY relies mainly on how much money is invested in determining how much interest is earned. Consider these aspects of the APR:

  • Investments that make interest regularly
  • Rate of interest

With suitable compounding periods, the APY distinguishes itself from other yield measures. This is because it relies on the interest rate that is paid on the quantity of money that is invested. For example, some investors can get 2% interest for a certain amount, while others get varying fractions of interest based on the amount of money they put into the fund.

Difference Between APR and APY 

  1. Annual Percentage Rate (APR) is derived from Annual Percentage Yield (APY), which was previously stated as Annual Percentage Rate.
  2. Because APR does not consider the compounding interest element, which is a factor in APY, APR is not practical.
  3. APR is used to compute the interest that must be paid on money that has been loaned, whereas APY is used to calculate the profits made on money that has been deposited into a checking account.
  4. APR and APY are both useful for calculating interest. However, APR is used to pay interest, and APY is used to compute the amount of money that has been accrued in interest.
  5. Unlike APR calculations, in which a borrower can lose money, an investor can profit from the investment in APY calculations.

Comparison Between APR and APY 

Parameters of ComparisonAPRAPY
MeaningThe annual percentage rate (APR) is a financial statistic used to determine the interest charged on loan.The annual percentage yield (APY) calculates the attested amount of interest that a person will earn.
Term  Annual Percentage Rate (APR) was used to describe the calculation.Annual Percentage Yield was the metric used to express it.
PurposeThe annual percentage rate (APR) is used to compute the total interest paid on various loans over an entire year.The annual percentage yield (APY) is used to compute the total interest earned by placing a sum of money in a savings account for the entire year.
DifferenceThe annual percentage rate (APR) is utilized when calculating how much money is lost in interest on actual money; the annual percentage rate (APR) is used.    The annual percentage yield (APY) is used to compute the total interest fee that is earned by investing.
ExampleObtain money from a buddy in exchange for committing to a contract for a period of a few months.Putting money in a bank and earning interest on that money over some time is known as compounding.

References

  1. https://link.springer.com/article/10.1007/BF02920210
  2. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2946399