The first thing that could get confusing when you get involved with cryptocurrency is the ambiguous terms from blockchain to different financial terms. Blockchain terms may sound familiar, but the investment terminologies can be difficult to grasp.
We’ll be sharing some light on what APY and APR mean to investment. By the end of this read, you will see and understand the difference between both terms even if you never had an idea of what they were.
What is APR?
APR is the acronym for annual percentage rate, which is a yearly fund that you get as investment interest. It often comes with additional costs or fees but it doesn’t compound more interest. The investment works with a simple interest rate so your profit depends on the original investment.
An example is if you invest 1000 coins with a yearly interest rate of 10%, you will get 1,100 coins at the end of the first year, 1,200 at the second year and 1,500 at the end of the fifth year. This money doesn’t include any applicable fees. Yet, your investment will keep growing by 10%.
What is APY?
APY is an acronym for annual percentage yield. It is the rate you earn on an account over a year and it has a compound interest. The way compound rate works is that investors can earn interest on interest by adding their profit to the initial sum of investment they made. For instance, you will get rewards for staking and add them to the overall staked coins so that you can gain higher profit.
The difference? APY is the amount of interest you get to earn on your savings and APR is the interest you owe.
The Difference Between APY and APR
APY and APR are the same tool but bring different results. They are the same because both are yearly investment threats but in the case of APY, it provides higher yield profit due to compounding.
Several DeFi and cryptocurrency ventures use APR but if you want an investment with compound interest, you can compound it manually. Some users prefer to invest their profit daily, weekly or monthly in a bid to get higher profit.
If you want the best APR, you should look for the ones with the lowest credit numbers, while the best APY is the one with the highest account or investment.
Are APR and APY Calculated Differently?
APR and APY are calculated based on interest rate but each have its additional factors. APY is known to give the most accurate idea of the account’s earning power, while APR will give you an idea of how much you owe. However, the best way to look at it is to consider both rates. Think of APY as a savings account with a higher interest rate for the first three months or APR like credit cards with 0% introductory rates.
A simple example is:
Let’s say you have a savings account with $5,000 in it and it earns a 2% APY compounded monthly. Assuming you do not make any additional deposits, at the end of one year the monthly compounded account would yield a balance of $5,100.92. If that same account were compounded annually, the balance at the end of the year would be $5,100.00. That’s an insignificant difference, but consider what happens if you were to deposit $100 a month to the accounts in each scenario. The account that’s compounded monthly would end the year with a balance of $6,311.98, while the annually compounded account would have $6,300.00. In other words, the higher the balance, the more frequency of compounding impacts the balance.
|APR (Annual Percentage Rate)||APY (Annual Percentage Yield)|
|APR is annual percentage rate, an investment rate with simple interest||APY is annual percentage yield, based on compound investment. APY|
|APR includes interest on interest and not only interest on the initial investment.||APY is more profitable. APY is mostly possible due to manual compounding|