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Convert between APR (Annual Percentage Rate) and APY (Annual Percentage Yield) to understand the true cost of loans or the real return on investments with compound interest.
APR (Annual Percentage Rate) is the yearly interest rate without taking compound interest into account. It's the nominal or stated interest rate. APR is commonly used for loans, credit cards, and mortgages to show the cost of borrowing money over a year.
APY (Annual Percentage Yield) is the effective annual rate of return taking into account the effect of compounding interest. APY is typically used for savings accounts, CDs, and investments to show the actual return you'll receive over a year. APY is always higher than or equal to APR when interest compounds more than once per year.
| Aspect | APR | APY |
|---|---|---|
| Full Name | Annual Percentage Rate | Annual Percentage Yield |
| Compounding | Not included | Included |
| Type | Nominal rate | Effective rate |
| Common Use | Loans, credit cards | Savings, investments |
| Value | Lower or equal to APY | Higher or equal to APR |
Where n is the number of compounding periods per year
Where n is the number of compounding periods per year
For a 5% APR, here's how APY changes based on compounding frequency:
When comparing financial products, always use APY for savings accounts and investments to see your true return. For loans, compare APRs, but remember the actual cost will be higher due to compounding.