What is the difference between APR and APY?


Some people may be wondering what the difference between APR and APY is - as some sites will use one and some sites will use the other. The difference is quite simple really, and has to do with compounding.

For startes, APR stands for "Annual Percentage Rate" and APY stands for "Annual Percentage Yield". APR is the actual rate that is offered, but most places will compound your interest at certain intervals. Compounding essentially means adding the interest you've earned to your balance, which means the next time interest is calculated, that money will earn you interest as well. APY takes this into account and reflects the rate of return taking into account compounding.

For example, if you invest $100 at 10%, compounded monthly, you won't earn $10 over the course of a year - you'll earn roughly $10.47, meaning your effective yield was 10.47%. The difference appears to be small, but given a great deal of money and a bit of time, it adds up.