Savings 101: Understanding APR vs. APY
Interest rates play an important role when deciding where to borrow or invest your money. But interest rates often show up in two ways: an annual percentage rate (APR) and an annual percentage yield (APY). Not sure what means what? Here's the difference between the two and how they're typically used.
APY takes into account the compounding nature of interest while APR does not, so APRs tend to be lower than APYs for a given base interest rate. For this reason, banks generally list the APR for debt-related accounts such as credit cards and mortgages, whereas APY often appears next to interest-bearing accounts such as certificates of deposit (CDs) and money market accounts.
The base interest rate is essentially a simple interest rate for a specific period of time, such as a day or a month. If your credit card charged a base rate of 1% per month, it would list an APR of 12% (1% per month x 12 months). That same account, however, would carry an APY of 12.68% (calculated using a fairly complicated formula of (1 + base rate)# of periods - 1 ). Why the difference? Compounding interest.
Here's how that works: Starting with a balance of $1,000, the first month's interest would be $10, or 1% of $1,000. The second month's interest would be $10.10, or 1% of $1,010, since the interest is calculated on the original balance plus the first month's interest. The third month's interest would be $10.20, or 1% of $1,020.10, and so on. The same is true if you are calculating the interest charged on a loan or earned on an account.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV