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September 2, 2005

What is the Difference between APR and APY?

As I was getting out of debt and began to accumulate some money that I actually wanted to save, I came across some banks advertising their APR (annual percentage rate), and some their APY (annual percentage yield). Not having a background in finance, I found this a little confusing. What exactly is the difference between them, and which one should I pay attention to?

It's really pretty simple. The APR is the interest percentage paid on your money yearly. But since that is usually divided up and paid monthly, you get a slightly higher return. That's thanks to compound interest, meaning you're earning interest on your original principal plus previously earned interest.

That's what the APY is -- the effective yearly rate received when your re-deposit interest payments (in other words, your yield).

Personally, the practice of advertising the APY seems just a tiny bit false (interest is your money, after all -- just like making regular small deposits every month). But it is the best way to figure out where you'll get the best deal, particularly because different accounts might offer different compounding schedules (how often you get paid interest -- more frequently means a higher yield), and the APY wraps it up into one easy-to-compare number.

Posted by Frank at September 2, 2005 9:06 AM

Comments

I've had this explained to me before, but this is the fist time I've grokked it. Thanks for putting this in plain English.

Posted by: Marc
at September 3, 2005 8:42 AM

I have always wondered what the difference was as well. Good find!

Posted by: Tim
at September 3, 2005 3:49 PM

I work at a bank, and I believe it is a government regulation that states that if we are quoting interest rates, we have to give out the APY first, then the rate (but giving the rate is optional).

Posted by: Meimur
at September 3, 2005 7:40 PM

So the APY looks better, but is really the same. Thanks. That is a good simple explanation for a regular guy like me.
Ostrauder
http://www.fightingdebtblog.com/

Posted by: Ostrauder
at September 4, 2005 9:16 AM

I'm glad this might have helped some. And Meimur, thanks for sharing that. I wouldn't have guessed that the APY would be required by regulation.

Posted by: Frank
at September 7, 2005 11:34 AM

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