APY vs. APR: The Critical Difference in Interest Rate Calculations
Warren Team
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Key terms
- Interest RateThe percentage charged by a lender for borrowing money, or earned on savings and investments. Can be fixed or variable depending on the financial product.
- Annual Percentage Rate (APR)The yearly cost of borrowing money, including interest and fees, expressed as a percentage. APR provides a complete picture of loan costs beyond just the interest rate.
- Annual Percentage Yield (APY)The real rate of return earned on an investment, taking into account the effect of compounding interest. APY is typically higher than the stated interest rate.
- Compound InterestInterest calculated on both the initial principal and accumulated interest from previous periods. Often called 'interest on interest,' it's a powerful force for growing wealth over time.
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