What is an APR?
An Annual Percentage Rate (APR) measures the amount of interest you’ll be charged yearly when you borrow. Having a lower APR means a lower amount of interest the buyer will have to pay. APR’s can make it easy to compare lenders and different loan options, and is provided in a disclosure statement when searching for a lender. It may also include any charges, a list of scheduled payments, and the total dollar cost it will take to repay a loan if the term for the mortgage is held until the end.
What is an APY?
An Annual Percentage Yield (APR) is the rate of return that will be earned in one year if the interest is compounded. The compounded interest allows for a higher interest payment periodically. The more often interest is compounded, the higher the APY. Compound interest is the interest earned on the money put into an account along with the interest that receives over time. Another type of interest is simple interest, which is simply the interest on the principal amount you have in the account.
APR vs APY
APR and APY both are a measurement of interest; however APR measures the charged and APY measures the interest earned. APR is used for a more accurate indicator for how much a loan will cost because it includes the lender’s origination fees. APR can be measured more easily than APY since APR doesn’t include compound payments. When compound interest is involved, APY is more useful for accounting for its value. APR can help decide on which lender or loan options there are while APY can be helpful to see how much of savings will accumulate over time. APY is a more accurate measure of the yearly cost of a loan than APR and is a more accurate indicator of a loan’s total cost.