What are APR and APY? What are the differences? 🤔
APR (Annual Percentage Rate) and APY (Annual Percentage Yield), two concepts we often hear in the financial world, play a critical role in investment and borrowing processes. These two terms express interest rates differently and can have a direct impact on financial gains or costs.
Let's take a closer look at what APR and APY mean, the differences between them, and which one is important in which situations.
What is APR (Annual Percentage Rate)?
APR (Annual Percentage Rate) can be translated into Turkish as "Annual Percentage Rate" and shows the annual interest rate of a loan or investment. APR is a simple interest rate and is calculated only on the principal. It shows the borrower or investor how much interest they will pay or earn during a given year.
APR is often used in the following situations:
- Credit card interest rates
- Consumer loans
- Mortgages
However, since APR is calculated only on the principal, it does not take into account the effect of compound interest. This means that APR does not always reflect the full annual return, as the number of times interest is compounded during the year is an important factor.
What is APY (Annual Percentage Yield)?
APY (Annual Percentage Yield) shows the total return obtained by compounding interest returns. APY also includes the effect of compound interest, which is calculated at certain intervals (such as daily, monthly, quarterly) throughout the year and added to the principal.
Compound interest allows the interest on an investment to be calculated not only on the principal, but also on the interest earned in previous periods. For this reason, APY is usually higher than APR. APY more accurately reflects how investments grow over time.
Areas where APY is used:
- Bank deposit accounts
- Investment funds
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