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What is Interest, APY, and APR?
Understanding the terms APY, APR, and interest is helpful for making informed financial decisions. These concepts play a significant role in both borrowing and saving money.
INTEREST
Interest is the cost you pay when you borrow money, or the money you earn when you save or invest. For example, if you have $100 that earns 4% interest, you would multiply $100 by 4% (or 0.04). So, $100 x 0.04 = $4. You would earn $4 on your principal.
Now let’s say you have an account that compounds interest throughout the year. What is compound interest? Compound interest is the money the bank pays you on your balance (the interest) PLUS the money that interest earns over time. This is where APY
comes in.
APY
APY stands for “Annual Percentage Yield”. The Annual Percentage Yield is the rate that reflects the total amount of interest you can earn on money in an account in one year, based on the interest rate and the frequency of compounding within that year.
The APY includes compounded interest. Basically, the APY tells you how much you will earn over a year.
The main difference between interest and APY is that interest accounts for the money made only on the original amount (the principal) while the APY includes the money made on the interest as well.
INTEREST AND APR
When you take out a loan, the interest rate refers to the cost of borrowing the money. APR stands for Annual Percentage Rate. It is the cost of the credit shown as a yearly rate. It includes the interest rate plus any other additional charges associated
with the loan.
Links to Related Resources
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