APR vs APY Calculator: True Cost Comparison

Understanding the difference between Annual Percentage Rate (APR) and Annual Percentage Yield (APY) is crucial for managing loans or savings. While APR shows the simple interest rate, APY accounts for the power of compounding. Use this tool to compare rates, include hidden fees, and visualize the long-term impact on your balance.

Stated APR (%)

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Principal Amount ($)

Compounding

Fees ($)

Comparison Results

Effective APR

Effective APY

How APR and APY Affect Your Wallet

The distinction between APR and APY is one of the most important concepts in personal finance. Whether you are taking out a mortgage or opening a high-yield savings account, knowing these figures ensures you don't overpay for debt or under-earn on your investments.

The Mathematical Difference

APR represents the periodic interest rate multiplied by the number of periods in a year. However, it fails to account for compounding. APY, on the other hand, reflects the real rate of return by including the effect of interest earning interest. The formula for APY is:

$APY = (1 + r/n)^n - 1$

Where $r$ is the APR and $n$ is the number of compounding periods per year.

Why Fees Matter

Many lenders advertise a low APR but charge high origination fees. When you include these fees into your calculation, your "Effective APR" increases significantly. Our calculator allows you to factor in these costs to see the true price of a loan.

Strategy for Borrowers vs. Savers

If you are a borrower, you want the lowest APY possible. If you are a saver, you want the highest APY possible. Always ask banks for the APY when comparing savings accounts, as it provides a standardized way to compare products with different compounding schedules.

Frequently Asked Questions

+ What is the main difference between APR and APY?

APR is the annual rate of interest without taking compounding into account. APY is the effective annual rate of return taking into account the effect of compounding interest.

+ Why is APY always higher than APR?

APY is higher because it calculates interest on the interest earned in previous periods, whereas APR only calculates interest on the principal.

+ Does compounding frequency change the APR?

No, the APR remains the same regardless of compounding. However, more frequent compounding (like daily vs. annually) will increase the APY.

+ How do fees affect my loan cost?

Fees like origination or closing costs are added to the total cost of borrowing, effectively increasing the interest rate you pay over the life of the loan.

+ Which one should I look at for a savings account?

Always look at the APY for savings accounts, as it tells you exactly how much your money will grow in one year.