Annual Percentage Yield (APY)
What Is Annual Percentage Rate (APR)
Annual Percentage Rate (APR) is the yearly interest rate charged for borrowing money or earned through an investment, expressed as a percentage of the principal amount. Unlike Annual Percentage Yield (APY), which includes the effects of compounding interest, APR represents the simple annual interest rate without factoring in compounding. In traditional finance, APR often includes other costs associated with the loan or credit, such as origination fees, closing costs, or mortgage insurance.
How Is the Annual Percentage Rate Calculated
The formula for APR is:
APR = (Interest / Principal) × (365 / Days in term) × 100
Determine the total interest paid or earned over a specific period and divide it by the principal amount, which is the original sum of money invested or borrowed. Multiply the result by 100 to express it as a percentage.
APR is useful for comparing the costs of loans or the returns on investments where compounding does not occur or when a simpler comparison is needed.
APY vs. APR
It's important to distinguish APY from Annual Percentage Rate (APR). While APY includes the effects of compounding, APR does not. As a result, APY will always be equal to or higher than APR for the same nominal interest rate. When evaluating investment options or loan costs, it's crucial to compare APY to APY and APR to APR for an accurate comparison.