While APR is a more accurate estimation of the total cost of a loan than the nominal interest rate, it is limited because it only considers a simple interest rate. If the interest compounds on a smaller time frame than annually (such as monthly or semi-annually), the actual interest paid will be higher than the APR advertised. Factoring in compounding interest that happens within a year gives you a loan's APY, or Annual Percentage Yield (sometimes also called EAR, or Effective Annual Rate). As a helpful rule of thumb, most credit card companies use an APR compounded monthly, whereas most mortgages use an APR that is calculated on an annual basis and is therefore the same as APY. If you are carrying credit card debt, your APR is already high, to begin with, but your APY is even greater than the stated APR, plus you may be charged additional fees for late payments! Here is how to remember interest rate, APR, and APY: Compounding interest monthly rather than annually and other maneuvers like these to further enslave those in credit card debt is why credit card companies and other consumer lenders have a poor reputation. Now that you know the difference between the nominal interest rate, annual percentage rate, and effective annual rate, consider sharing this information with a friend to help them with their financial situation.APR vs APY
When Is APR vs APY Used?
APR vs APY FAQs
APR is an estimation of the total cost of a loan that considers a simple interest rate. Factoring in compounding interest that happens within a year gives you a loan’s APY.
APR stands for Annual Percentage Rate.
APY stands for Annual Percentage Yield.
Although many credit cards advertise their low APR, they do, in fact, charge interest based on APY. Many banks are required to also inform you of the APY of any card you apply for.
Credit card companies compound interest monthly rather than annually. This and other maneuvers further enslave those in credit card debt and create a poor reputation for many consumer lenders.
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.
To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.