What’s the Difference Between APR and APY? | Credit Intel by American Express

Summary

APR (Annual Percentage Rate) and APY (Annual Percentage Yield) are crucial financial terms to understand when borrowing or saving money. APR represents the cost of borrowing, such as with loans or credit cards, where a higher APR means more money paid over time. APY reflects the earnings from savings accounts or investments, factoring in compound interest. For loans, it's important to seek low APR programs, while for savings, higher APY rates are beneficial. Grasping these differences can help in making smarter financial decisions, from choosing the right credit cards to the best savings accounts.

Takeaways

• 😀 APR stands for Annual Percentage Rate, which is the cost of borrowing money.
• 😀 APR is used in loans, like mortgages and credit cards, and higher APR means higher overall costs.
• 😀 APY stands for Annual Percentage Yield, which is the money earned on savings accounts or certificates of deposit.
• 😀 APY takes into account compound interest, which includes any interest accumulated from previous periods.
• 😀 For example, with a savings account paying 1% interest, you earn $10 in the first year, and $10.10 in the second year if compounded.
• 😀 Compound interest helps you earn more over time, as interest is calculated on the balance, including accrued interest.
• 😀 When taking out loans, it’s important to seek programs with low APR to minimize borrowing costs.
• 😀 When saving or investing, focus on accounts with high APY to maximize the interest you earn.
• 😀 Understanding the difference between APR and APY is essential for making informed financial decisions.
• 😀 Credit Intel from American Express is a helpful resource for navigating personal finance and making smarter decisions.

Q & A

What is APR?

APR, or Annual Percentage Rate, is the cost of borrowing money, such as with a mortgage or credit card. It represents the interest rate and any fees charged by the lender, which can be spread over the course of a year.

How does APR affect the total cost of a loan?

The higher the APR, the more money you'll pay over the life of the loan. APR directly impacts the total amount you’ll repay, including both interest and any associated fees.

What is APY?

APY, or Annual Percentage Yield, is the amount of interest earned on savings accounts or investments, including compound interest. It reflects the actual return on your investment or savings over one year.

How does compound interest affect APY?

Compound interest means that you earn interest on both your initial deposit and any unpaid interest from previous periods. This increases the overall return, which is reflected in the APY.

What’s an example of how compound interest works?

For example, if you have $1,000 in a savings account with 1% annual interest, you’ll earn $10 in the first year. With compound interest, the next year, you’ll earn 1% of $1,010, so $10.10.

Should you prioritize APR or APY when choosing financial products?

When borrowing money, prioritize low APR to reduce the cost of borrowing. When saving or investing, prioritize high APY to maximize the interest you earn.

What is the main difference between APR and APY?

APR is the cost of borrowing money, including interest and fees, while APY is the interest earned on savings or investments, considering compound interest.

Why is understanding APR important for borrowers?

Understanding APR is crucial for borrowers because it helps you compare different loan offers and choose the one with the lowest cost in terms of both interest and fees.

Why is understanding APY important for savers and investors?

Understanding APY is important for savers and investors because it allows you to choose accounts or investments that offer the highest return, factoring in compound interest.

How does Credit Intel help consumers in making financial decisions?

Credit Intel is a resource that helps consumers navigate personal finance by providing tools and information to make smarter financial decisions, such as understanding APR and APY.