APR vs APY: What’s The Difference?

The terms are very similar and both are related to interest rates. But one letter can make a huge difference.

APR

APR stands for annual percentage rate and refers to the interest rate applied to the principal amount of an investment or loan. The ambiguity begins here because APR represents different things in traditional banking and crypto.

APR in Everyday Life

In general finance, APR is used to calculate the interest rate you are charged for borrowing money. It’s also known as a credit card interest rate and is generated yearly.

APR in Crypto

The picture changes considerably when we pass to the crypto sphere.

APY

APY stands for annual percentage yield. It represents the rate of return you’ll earn on an investment, taking into account the effect of compounding interest.

How is APY calculated?

The inclusion of compounding interest makes calculating APY more complex, as it takes into account the number of periods at which the amount is adjusted based on the interest rate. To calculate the APY, you can use the following formula:

In Search of the Greatest Benefit

Summing up all the above, we see that APY is a certain winner. Unlike the APR, which only considers ordinary interest, the APY includes compound interest, which makes it much more profitable, other things being equal. Investment at 10% APY will eventually bring you more money than the same investment at 10% APR.

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