Money plays a vital role in society. Earning from different sources makes a man life simple and comfortable. Sometimes people have to balance all the situations according to obtain problems. While borrowing money or giving it to some other people, we can get interested in money. APR and APY are the annual percentage calculations regarding the interests paid or gained by the people. Let’s know about these terms in detail.
APR vs APY
The main difference between APR and APY is that APR derives as Annual Percentage Rate where APY stands for Annual Percentage Yield. APR is a measure to calculate the returns of the loan, credit card and some other for an entire year. APY is an actual rate that had added to your investment in an account. It says the interest that you earn by investing the money in your account.
APR is a measure that calculates the financial interests for different types of loans. APR stands for Annual Percentage Rate, where the name says that the total amount of interest for loans in a year. The APR compute the whole interest fee for the taken or borrowed amount in the entire year. APR can be nominal and effective according to the interests.
In Contrast, APY had derived as Annual Percentage Yield where it says about the Actual fee that had returned to an individual by investing some money in an account. APY says about the profit that a person receives according to their investments. It is calculated for a whole year rather than calculated for monthly.
Comparison Table Between APR and APY
| Parameters of Comparison | APR | APY |
| Meaning | APR is a financial measure to calculate the interest for lending money. | APY is used to calculate the attested amount of interest that an individual will gain. |
| Term | APR had derived as Annual Percentage Rate. | It had expressed as Annual Percentage Yield. |
| Purpose | APR help to calculate the overall interest for various loans, lending money for a whole annual year. | APY help to calculate the overall interest gain by investing an amount in an account for the whole year. |
| Difference | APR is used to find the loss of money in the name of interest for actual money. | APY is used to find the actual interest fee earned by investing. |
| Example | commandeer money from a friend for agreeing to a contract for a few months. | Investing money in a bank and having interest for that amount in a period. |
What is APR?
APR had expressed as Annual Percentage Rate where it states the interest spawn for borrowed money, which had charged by the investor. The loans given by the people or lending money from someone will post some interest according to the amount commandeer. The APR helps to calculate the total interest fee for the taken money in the whole year where it is simple than monthly calculating. APR can be nominal and effective according to the interests. Annual Percentage Rate is effective and formal according to the various types of lending. The APR will credit according to the contract signed between the investor and borrower. It is posed annually rather than the monthly fee. Annual Percentage Rate had used to calculate for various kinds of loans as follows. Bank loans, mortgage loans, credit card loans and some others. The aphorism to calculate the Annual Percentage Rate (APR) is
APR ={[(F+I)/P]/n} *365*100 where,
F = Fees
I = Interest paid for the loan based on contract
P = Principal
N = period of loan according to days
An individual can calculate the monthly interest by calculating APR primarily. Some of the factors of APR are
- Rate of interest
- Cost of the loan
- Fees or amount
So here, an individual should pay the interest depending on the factors. According to the APR, an individual does not have an undivided interest compared with APY. It will be convenient for all the borrowers by calculating the returns without paying unknowingly.
What is APY?
APY is a measure to calculate the earned amount by an individual after investing. APY had derived as Annual Percentage Yield, where an investor can gain profit by investing the money in an account. It is calculated for a whole year rather than calculated for monthly. The amount will increase according to the investment if an individual has a high investment can get a large amount of interest to their speculation.
APY help to calculate the overall interest gain by investing an amount in an account for the whole year. However, by knowing the annual percentage of interest had earned, an individual can calculate the monthly profit. The formula to determine the Annual Percentage Yield is
APY=(1+r/n) ^n-1 where,
r = annual interest rate
n = number of compounding intervals each year
APY primarily works on the effect of compounding interest, where the interest for a particular amount will depend on the invested amount. The factors of the APR are
- Compound interest or undivided right
- Interest rate
The APY differentiates with compounding intervals with a reasonable figure. It depends on the percentage of interest given for the invested amount. For example, some investors can get 2% of interest for an amount and, others get various proportions of interest according to the amount they invested.
Main Differences Between APR and APY
- APR derives as Annual Percentage Rate where APY had expressed as Annual Percentage Yield.
- APR doesn’t work on the compounding interest factor, where compounding interest is a factor in APY.
- APR calculates the interest to pay for the lending money, where APY calculate the profits for the funded amount in an account.
- Both APR and APY will help for calculations, but APR is used to pay, where APY is used to calculate the earned money.
- In APR, a borrower can lose money in APY calculations the investor can earn money.
Conclusion
APR had expressed as the Annual Percentage Rate, states the interest brought about for borrowed money, which will charge by the investor. The APR helps to calculate the total interest fee for the taken money in the whole year where it is simple than monthly calculating. APR can be nominal and effective according to the interests.
APY is a measure to calculate the earned amount by an individual after investing. APY had derived as Annual Percentage Yield, where an investor can earn profit by investing the money in an account. It is calculated for a whole year rather than calculated for monthly. The formula to determine the Annual Percentage Yield is APY=(1+r/n) ^n-1.
References
- https://link.springer.com/article/10.1007/BF02920210
- https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2946399