LeoGlossary: The Difference Between APR and APY

There is a subtle yet distinct difference between annual percentage return (APR) and annual percentage yield (APY).

The first is absent any compound interest. APR is the cost of money. The lens from which it is viewed is based upon which side of the equation one is looking at.

If one is investing, the APR is the return one receives each year. To flip it, if borrowing money it is the interest rate paid (the lender enjoys the APR).

With APY, it does include compounding. The return is determined on smaller time frames and paid out. Hence, the APY might include payments based upon the monthly interest added in. Credit cards are this way.

From an investment standpoint, the APR might be one number while the APY is slightly higher. This is due to the compounding effects.

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