In the cryptocurrency market, various terms may seem a little confusing at first. One of these terms is the difference between apr and apy. For this reason, in this article, we are going to talk about APY and APR and we hope that by the end of this article, you will be able to distinguish the difference between APR and APY.
APY and APR are both used to calculate interest on investments and credit, and significantly affect how much you earn or pay down on your account balance. APR and APY are two completely different concepts. In the following, we will learn more about both concepts and their differences.
What is APR?
APR (Annual Percentage Rate) stands for annual percentage rate, which means the annual funds you receive as investment interest. APR is essentially a simple interest rate, so your profit is directly related to the original investment.
So APR is equivalent to the interest you receive on your capital over a year and is considered equivalent to the interest declared by banks.
Financial institutions often advertise their credit products using the APR because borrowers appear to pay less over the long term for accounts such as mortgages and credit cards. If you intend to borrow digital currency, this tool can help you a lot.
APR does not take into account the compounding of interest in a year and will be calculated by multiplying the periodic interest rate by the number of periods in the year in which the periodic rate will apply.
What is APY?
APY (Annual Percentage Yield) stands for annual percentage yield, which shows the real rate of return on investment, taking into account compound interest.
Unlike APR, APY allows investors to earn interest on their profits. In this way, compound interest, unlike simple interest, allows investors to add their profit to the initial sum of the investment. For example, in the DeFi world, you can get staking rewards and add them to the staking coins and you will get more profit next time.
Investment firms will generally use the APY they pay to attract investors to advertise their work, as it appears they will earn more on things like certificates of deposit (CDs), individual retirement accounts (IRAs), and savings accounts. Unlike APR, APY takes into account the frequency with which interest is applied. This seemingly small difference can have important implications for investors and borrowers. APY will calculate by adding +1 periodic rate as a decimal and multiplying it by the number of times equal to the number of periods that this rate will apply and then it will deduct from it.
What is the difference between APY and APR?
As you may have noticed, APY and APR are similar concepts on the surface, but they give you different results. Both refer to the annualized return on investment, but APY offers a higher rate of return due to the addition of daily interest to the principal.
Several differences between apr and apy are as follows:
- APY takes into account compound interest.
- APR does not take into account compound interest.
- The effect of compounded APY is to increase investment growth or borrowing costs.
- Investment growth or APR borrowing costs are lower than APY.
- APY will recommend it to savers and investors.
- APR will recommend for borrowers.
APR will calculate as follows:
- APR = periodic rate x number of periods in a year
For example, if you invest 2,000 coins at an annual interest rate of 10%, you will receive 2,100 coins by the end of the first year, 2,200 coins by the end of the second year, and 2,500 coins by the end of the fifth year. Of course, this does not include any costs. However, your investment will grow steadily at around 10% of the original investment every year.
Here’s how the APY will calculate:
- APY = (1 + period rate) number of periods – 1
For example, let’s say you invested the same 2000 coins as before, but you add your profit to the total capital. If your compound interest is 10% with daily interest, you will receive 2105 at the end of the first year, 2221 at the end of the second year, and 2648 at the end of the fifth year. Moreover, the higher the interest rate and the more time you spend, the better your result will be.
What is the difference between Apr and Apy in DeFi and Stake cryptocurrency?
Both terms in DeFi are related to interest rates, APR is the annual interest rate. It measures the interest charged when borrowing money. APY is a measure of the interest you earn when you deposit an amount in any currency. Understanding the difference between APY and APR can help you make sound financial decisions.
APR and APY are important concepts to consider when managing personal finances. The more interest combinations, the bigger the difference between apr and apy. If you’re a borrower, trying to apply for a credit card, or looking for the highest rate of return on a savings account, you need to know how to use these two interest calculators and understand the difference between APR and APY.
Depending on whether you are a borrower or a lender, financial institutions have different incentives to quote different rates. Always make sure you understand the quoted rates and then look at comparable rates from other institutions.
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