What are the differences between APR and APY?

What are the differences between APR and APY?

If you are involved in the crypto world, you will come across these two concepts that you will encounter most of the time: APR and APY. These two concepts are often confused with each other. In this article, we will answer the question of what is APR and APY, and we will touch on what the concepts mean basically, and the similarities and differences between them.

Both are popular terms used to determine interest on investment and loan products.

You will often see these terms in crypto exchanges, wallet staking reward calculations, or DeFi products. They are also considered an important metric for calculating how much you gain or how much interest you have to pay when applied to your account balances. However, even if these two terms look the same, both have some differences from each other.

For beginners, there is an important distinction that I would like to point out at first. APY (Percent Annual Return) takes mixture interest into account, but APR, which stands for annual percentage rate, does not.

Things to Know:

  • APR symbolizes the annual rate used to make money or borrow money.
  • The more frequent the compounds of interest, the higher the difference between APY and APR.
  • APY takes compound interest into account, but APR does not.
  • The composite interest varies from simple interest in the result that the daily rate of interest is multiplied by the number of days between payments.
  • Generally, a high APY is in favor of the investor, but there is also a daily, weekly, monthly display on asset management platforms. In APY, the monthly interest rate is added up every month.
  • Investment companies usually promote APY, while lenders prefer to advertise APR.

What is APR (Annual Percentage Rate)?

APR stands for simple interest. In other words, it refers to the annual interest to be paid or the annual simple interest you will earn.

Generally, a high APR rate is not good for borrowers.

In terms of borrowing, the APR shows the annual interest rate you pay on credit cards, loans, and other debt. It includes both the interest rate on the loan borrowed and the fee charged by the lender.

Formula:

APR = Periodic Rate (Based on a Daily or Monthly period) X Number of periods per year

What is APY (Annual Return Percentage)?

Usually, investment companies promote the APY they care to attract investors. This is because they know that they will earn more from long-term services such as savings accounts and individual retirement. Unlike the APR, the repetition with which the APY is charged also takes into account the effects of interest rates during the year.

Formula:

APY = (1 + rate per period)^ number of periods– 1)

What is the Difference Between APR and APY?

The main difference between APR and APY is that APY contains compound interest. APR, on the other hand, does not include compound interest.

Imagine you have 100 USDT.

Let’s say you have 2 investment options.

  • Option 1: Let’s assume 10% APR if you lock your USDT for one year with 52 Weeks per year.
  • Option 2: Let’s assume 10% APY if you lock your USDT for one year with 52 Week period.

Results:

Option-1: 110 USDT is refunded.

Option-2: 110.51 USDT is refunded.

Option B is higher because APY determines the new interest rate to be applied by adding the earnings paid in previous periods in order.

SEE ALSO: Why is DeFi Different?

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Caroline Tetra

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