APR and APY: Understanding the Differences and Their Impact on Your Finances 🚀

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APR (annual percentage rate) and APY (annual percentage yield). Two concepts that sound similar but hide important differences. They affect our financial decisions more than we think.

APR: Annual Percentage Rate 💰

The APR is simple. It represents annual interest calculated on the initial capital. Nothing more. It is what you pay for borrowing money.

You see it everywhere:

  • Credit cards
  • Personal loans
  • Mortgages

I find it curious that the APR does not take compound interest into account. That's why it doesn't really show how much you'll pay when interest accumulates multiple times a year. It's like seeing only part of the picture.

APY: Annual Percentage Yield 📈

APY goes beyond. It includes the magic effect of compound interest. It does not only consider the initial interest. It also accounts for interest on interest. Fascinating.

It usually appears in:

  • Savings accounts
  • Bank deposits
  • Cryptocurrency staking 🌕

It is always greater than the APR for the same rate. It better reflects how your money grows over time. Or how your debt increases.

Key Differences Between APR and APY 🔥

The big difference is in compound interest. APR ignores it. APY embraces it.

Think of it this way: A card with 15% APR charges you simple interest on what you owe.

An investment with 15% APR includes capitalization. You earn more. Much more.

And frequency matters quite a bit. Daily, weekly, monthly... the more frequent, the greater the difference between the two. It's not entirely obvious at first glance.

Conclusion ⭐

APR vs APY. A crucial distinction for your finances.

The first is basic. The second, complete. When looking at long-term investments or loans, the APY seems to show the real picture.

Your financial decisions will improve if you understand this difference. Your money will grow differently depending on the concept you apply. Or your debts. Something to keep in mind 💸.

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