APR/APY Calculator
Convert between Annual Percentage Rate (APR) and Annual Percentage Yield (APY).
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Understanding True Interest: APR vs. APY
Our APR to APY Calculator helps you convert between these two crucial rates to understand the true impact of compounding on your savings, investments, or loans.
What is the Difference Between APR and APY?
Although often used interchangeably, APR (Annual Percentage Rate) and APY (Annual Percentage Yield) represent two different ways of looking at interest.
- APR (Annual Percentage Rate): This is the simple interest rate charged or earned over a year. For loans, it often includes certain fees, making it a good measure of the annual cost. However, it does not account for the effect of compounding within the year.
- APY (Annual Percentage Yield): This is the effective annual rate of return, taking into account the effect of compound interest. Because APY includes interest earned on previously earned interest, it provides a more accurate picture of what you will actually earn on a savings account or pay on a debt that compounds.
How It Works: The Conversion Formula
The calculator uses the standard formula to convert APR to APY:
APY = (1 + (APR / n))ⁿ - 1
- APR: The Annual Percentage Rate as a decimal.
- n: The number of compounding periods per year (e.g., 12 for monthly, 365 for daily).
Interpreting the Results
The calculator instantly shows the equivalent APY for a given APR and compounding frequency. You will notice that the more frequently interest is compounded (e.g., daily vs. annually), the higher the APY will be, even if the APR is the same. This highlights the power of compounding. When comparing savings accounts, always look at the APY. When comparing loans, the APR is the more standardized figure to use.
Common Interest Rate Misconceptions
- Myth 1: APR and APY are the same. They are not. APY accounts for compounding and reflects the true return, while APR does not.
- Myth 2: A higher APR on a loan is only slightly worse. Because loan interest compounds, a slightly higher APR can lead to significantly more interest paid over the life of a long-term loan like a mortgage.
Frequently Asked Questions
What is the difference between APR and APY?
The Annual Percentage Rate (APR) is the simple annual interest rate, not including the effect of compounding. The Annual Percentage Yield (APY) is the effective annual rate that includes compounding, showing what you'll actually earn or pay. APY will always be equal to or higher than APR.
How do you calculate APY from APR?
To calculate APY from APR, use the formula: APY = (1 + (APR / n))^n - 1, where 'n' is the number of compounding periods per year. Our calculator automates this conversion for you.
Which is better, APR or APY?
When you are saving or investing, a higher APY is better because it reflects greater earnings. When you are borrowing money (like a credit card or loan), a lower APR is better as it represents a lower cost of borrowing.
Does APY include fees?
Typically, the advertised APY for a savings account does not include account maintenance fees. However, for loans, the APR often includes certain lender fees, making it a more comprehensive measure of the cost of borrowing than the interest rate alone.
Practical Tips for Consumers & Investors
- For Savers: Always compare savings accounts using the APY. A higher APY means your money will grow faster.
- For Borrowers: Always compare loans using the APR. It's the standardized rate required by law (Truth in Lending Act) and includes most fees, giving you a better comparison of the true cost of each loan.
- Credit Cards: Pay your balance in full each month to avoid paying the high APR. Credit card interest compounds daily, which can cause debt to grow very quickly.
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