Summary:
- Annual percentage rate (APR) measures the interest you’ll be charged when you borrow
- Annual percentage yield (APY) measures the interest you earn when you save
- The lower the APR, the less you may have to pay interest when you borrow. And the higher the APY, the more you earn in interest when you save.
Over the past couple of years, the popularity of cryptocurrency investments has skyrocketed and every few months, we read about currencies that have had a quick 100% increase. However, customers who need more consistent returns usually choose to employ staking or DeFi programs. It might take time to assess the costs and benefits of such solutions. So let’s break down APR and APY, and analyze how they differ.
Understanding the key differences between the two can aid in making wise financial decisions. Both phrases have to do with interest rates and are comparable. But what are they specifically? And why do they matter?
Read on to find out.
What is APR?
The Annual Percentage Rate, or APR, is the less complex of the two metrics. This applies to loans or other borrowing types such as personal or credit card debt. APR is a comprehensive metric that incorporates the base interest rate and other expenses like fees and insurance.
Usually, it refers to monies borrowed through credit cards, auto loans, personal loans, mortgages, student loans, lines of credit, or lines of credit for home equity. The APR calculates the interest you’ll pay on any loan. So you could have to pay less interest if the APR is lower.
According to the Consumer Financial Protection Bureau, “APR is a broader indicator of the cost of borrowing money” compared to an interest rate. This is because APR can include the interest rate and other expenses like closing costs, insurance, and lender fees. The APR and interest rate may be the same if no lender costs are included in the APR, as is frequently the case for credit cards.
When evaluating some credit options, like those for vehicle finance, the APR may be more helpful than the interest rate because it may consider expenditures like lender fees.
What is APY?
The Annual Percentage Yield, or APY, is the second widely used metric. Unlike an APR, this is used for investments you make or money you get. It is often referred to as EAR or Effective Annual Yield.
You will make more money each year if the APY is higher. However, APY stands out since it takes compounding into account. The advantage of reinvesting your earnings at predetermined intervals is therefore included.
APY may demonstrate how much interest your investment might generate annually. In general, the higher the APY, the greater the interest generated by your investment but remember that the amount of money you have in your account will also affect how much you make.
In addition to the interest rate, the APY considers compound interest and how frequently it occurs in a year. Therefore, you receive interest on more than just the initial deposit when you receive compound interest.
Because it considers compounding, APY can be more valuable than the interest rate when comparing deposit accounts. For example, say you compare two deposit accounts with the same interest rate. The APY might show that the one that compounds daily would earn you more interest than the one that compounds annually.
Keep in mind that the APY for a deposit account is usually variable. That means APY can change and fluctuate with the market after the account is opened.
The Difference Between APR and APY
Both APR and APY/EAR measure interest. However, APY/EAR measure interest earned, whereas APR measures interest charged.
APR is frequently connected to credit accounts. Therefore, your overall cost of borrowing may be cheaper the lower the APR on your account.APY is frequently connected to deposit accounts. As a result, your potential profits might increase with higher APY on your account.
APR and APY in Crypto
APR rates are frequently marketed in traditional finance, especially for lending products, but APY rates are more frequently used to sell some investment products. Both APR and APY are widely utilized in the cryptosphere for a range of lending and borrowing possibilities through liquidity pools, staking services, yield farms, and other finance-related crypto platforms, including DeFi protocols, centralised exchanges (CEXs), and others. The vast majority of centralized and big DeFi crypto financing companies provide products with both APR and APY rates.
APR vs APY in a Nutshell
The difference between APR and APY is how much interest you will pay when borrowing vs. how much you will receive while saving. You could pay less interest while borrowing if the APR is lower. And the greater the APY, the more interest you could be able to earn on your savings. The next time you come across crypto investments, watch out for these numbers to make a wise investment decision.
