The difference between APY and APR is one of the most common questions hard money lenders get. The annual percentage yield (APY) is similar to the annual percentage rate (APR) used in the credit industry. The annual percentage rate (APR) illustrates how much a borrower will pay in interest and fees over the course of a year. Both APY and APR are annualized percentage rate standardized indicators of interest rates. They do, however, have significant distinctions. One is that APY takes compound interest into account, but APR does not. Furthermore, only compounding periods are included in the APY equation, not account fees.
How Is APY Calculated?
The annual percentage yield (APY) standardizes the rate of return by providing the exact proportion of compound interest generated over one year. The following is the formula for calculating APY:
APY = (1+r/n)n – 1 {r = period rate; n = number of compounding periods}
What Is the Difference Between APY and APR?
The annual percentage yield (APY) is used to compute the rate gained over the course of a year if interest is compounded and appropriately reflects the real return rate. APR, on the other hand, incorporates any fees or extra charges linked with the transaction. It is well known that interest compounding inside a year is not taken into account. Rather, it is a simple interest rate that is determined by multiplying the periodic interest rate by the number of periods in a year that the periodic rate is applied. As a result, it is misleading because it does not show how many times the rate is applied to the balance.
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