Annual Percentage Rate (APR) and Annual Percentage Yield (APY) may seem similar, but knowing the difference and how they are used will help you make better financial decisions.
| Compounding | Period |
|---|---|
| Annually | 1 |
| Semi-Annually | 2 |
| Monthly | 12 |
| Weekly | 52 |
| Daily | 365 |
APR (Annual Percentage Rate) is the annual rate of return — expressed as a percentage — before factoring in compound interest. APR only takes into account simple interest. You’ll run into APR most often when considering loan terms, and how much you’ll have to pay to borrow.
APR = [(Fees + Interest)/Principal] x (Number of Years) x 100
To calculate APR:
- Add up all fees and interest to be paid over the life of the loan.
- Divide the total fees and interest by the principal.
- Divide the result by the total period of the loan, in years.
- Multiply the result by 100.
The result is your Annual Percentage Rate expressed as a percentage.
Example: Calculate Your Daily Credit Card Interest Using APR Let’s say you would like to calculate how much interest will accrue today on your credit card. Your credit card charges 19.00% APR, compounds daily, and has a balance of $1000.
Express your APR as a decimal by dividing by 100. Divide your APR by the number of compounding periods. Multiply this number by your credit card balance. Daily Interest Accrued = 1000 x 0.19 / 365
In this case, your daily interest accrued would be $0.52. This amount would then be added to your balance for tomorrow’s calculation.
APR = [(APY + 1)^(1/Number of Periods) - 1] * Number of Periods
APY (Annual Percentage Yield) is the annual rate of return — expressed as a percentage — once you factor in compound interest. It's a standard evaluation of return based on one year. You'll run into this most often when considering deposit accounts, and how much you'll earn on your deposit.
APY = [1 + (APR / Number of Periods)]^(Number of Periods) - 1
To calculate APY using APR:
- Take APR and divide it by the number of compounding periods.
- Add 1 to the result.
- Raise the result by the Number of Compounding Periods.
- Subtract 1 from the result.
The result is your Annual Percentage Yield expressed as a percentage.
Example: Calculate Interest Earned On A Savings Account Let's say you want to calculate how much interest your savings account will pay you after one year. Your savings account pays 2.00% APY, and you have a balance of $1000.
Express your APY as a decimal by dividing by 100. Multiply this number by your account balance. Expected Annual Interest = 1000 x 0.02
In this case, your expected annual interest accrued would be $20.00. Your expected balance at the end of the year would be $1,020.00.