Annual Percentage Rate (APR) and Annual Percentage Yield (APY)
March 29, 2023
Annual Percentage Rate (APR) and Annual Percentage Yield (APY) are two terms you must recognize if you want to invest or borrow funds. They are both used to calculate interest for your investments but guarantee diverse results.
APR – Annual Percentage Rate
APR is a simple annual rate, incorporating any costs and fees associated with your loan. The APR on a loan aims to offer a full picture of the actual borrowing costs. Most typically, this percentage signifies interest charged by, for example, banks, but it can be applied to any investment as long as you’re a lending party.
What is essential is that APR does not take into account compound interest. The higher the APR, the more expensive it will be to borrow money. This means a loan or credit card with a higher APR will incur higher interest charges and fees over time.
There are variable and fixed APRs. A fixedAPR will not be subject to change, while a variableAPR’s interest rate may fluctuate at any moment.
APR is relatively easy to calculate since it is an annual, simplified take on interest. If you lend – the higher the APR, the better for you. If you borrow, tables turn.
APR is important for several reasons, one of them being that they make it relatively simple to compare different lenders and your loan options. It's essential to look at the APR rather than just the interest rate, as two loans with the same interest rate may have different APRs, depending on their fees.
APY – Annual Percentage Yield
APY is an annual total amount of interest you may earn on your crypto balance that considers compound interest. Compound interest is added periodically (daily, weekly, monthly, or yearly), to an investment, increasing the total balance. The greater the investment and the more often the compounding occurs – the higher the profit.
Let’s assume you invest $1000 with an APR rate of 9.57% and an APY of 10.47%. Compound interest is calculated in monthly intervals.
You will earn $104.7 in a year but $220 in two years. The power of compound interest grows with time since it is, essentially, the interest of your interest.
Both APR and APY are fundamental terms if you invest in cryptocurrencies. Generally, APR is most beneficial when you borrow, and APY works in your favor if you lend.
When you choose to invest, pay attention to both APR and APY as well as fees associated with transactions, extra benefits, and variability of interest rates. They all have a significant impact on your end balance.
If you plan any crypto investments or loans, pay attention to APR and APY rates to determine the profitability of your financial activities. Remember that APR is a simple annual rate that does not include compound interest, while APY has compound interest and increases your total balance every time interest is compounded.
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