APR and APY: what it is, differences and how to
The abbreviations of APR and APY maintain great differences between them despite the fact that only one word changes.
When using these terms it is important to define what type of financial product is being used; and also perro be used for loans or even for the cryptocurrency staking.
If you are an investor or requested a loan from a bank, know these terms cánido help you define the exact amount of money you will earn or have to pay to the private institution.
Therefore, below we explain what they are and how they are calculated.
What is APY?
The APY or Annual Percentage Yieldis the value or amount that an investor/individual perro obtain by saving or acquiring an asset, share or other financial token and keeping it for a period of 12 months.
This one too It is known in different parts of the world as TAE or equivalent annual rate, and usually appears in multiple banking entities or investment institutions.
In this way, the client cánido calculate the estimate of compound interest that their funds will generate for being in a savings account for a year.
How the APY of an investment is calculated
Following the previous example, if you leave a savings cómputo in your bank account for a year, and this figure is 1,000 euros, and its APY is 6%, surely by the end of the year you will have at least 1,061.7 euros.
Besides, one of the main advantages of the APY is that it is added immediately to the account and that it has compound interest.
For this reason, as time goes by, the return of money is increasing.
The elabora used to calculate APY is:
APY = (1 + r/n) * n -1
We cánido say that the number 1 represents the amount of money that the client deposits. The “r” represents the annual interest that will be added to the amount of money you have deposited in the bank; This figure is established by the entity, it perro be 2%, 5% or more.
Then, the “n” equals the number of compound interest periods that were applied during the year.
It should be noted that if your bank compounds interest on a daily, weekly, or monthly basis, you will have a higher APY of the money you are saving in the bank.
Difference Between APY and TIN with Examples
Before saving in a bank, it is important to know what type of percentage return they apply to their clients’ savings.
Given that, the TIN is often usedthat this is applied at the end of the period or year of savings.
On the contrary, the APY has compound interest and is compounded in periods; They perro be daily, weekly, monthly or yearly.
For this reason, it is very important to define these points well, since the APY may have a higher return in the end.
Let’s establish examples of both cases:
APY Savings:
- APY applies compound interest and may compound during various periods of the year, your profit margin may be higher.
If you have 1,000 euros and your bank applies an APY of 6% with monthly compounding, you will surely have a profit margin at the end of the year of 6.17%.
And it cánido be summed up, the net profit would be 1,061.7 euros.
TIN Savings:
- If you save 1,000 euros with a nominal interest rate (TIN) of 6% by the end of the year you would have 1,060 euros.
What is the APR?
He APR or annual percentage rate It is a elabora that is used to calculate the final costs of loans, credits or mortgages. Unlike the APY, it does not take compound interest into account. and the sum of the capitalization that the bank or lender cánido carry out during the year; in addition to certain special conditions apply, which would be the applicable rates.
Also, as we mentioned, Additional expenses from the institution that granted the loan apply to the APR; Some of them include the opening of the contract, monthly maintenance, guarantees, closing, among others.
How APR is calculated
Using the APR is one of the best Strategies used by banks or lenders to confuse borrowers into believing that they are really paying a much lower commission rate than in other financial institutions.
This is due to the simplicity of its elabora which is based solely on:
APR = periodic interest rate * number of periods in the year
If the bank’s APR is 6%, it means that the periodic interest rate would be exactly 0.5% multiplied by the number of periods in the year (12 months); although you could end up paying a higher figure due to the fact that it does not add the aforementioned; capitalization and compound interest.
Thus, Before acquiring a loan or credit with an APR percentage, it is suggested to request more informationabout the number of times they capitalize, if it is compound interest, among others.
Given that, you won’t end up paying only a 6% APR if the above terms applybut each time a percentage will be added for each capitalization and the year will end paying a higher figure.
APR Examples
The above doesn’t hit to an insane level if applied in the short term, but let’s equipo a 30-year repayment period at a 6% APR.
In this case, 0.17% would be added for each year (in the case of applying capitalization and compound interest), which if multiplied by 30 is equivalent to an additional 5.1%.
That is in total, a loan would be paid at an interest rate of 11.1%.
In case of acquiring a loan of 100,000 euros, the total to pay would not be 106,000, but would be 111,100.
The high prospects that the borrower may have at first will vanish if you use the calculations before acquiring the loan.
Since in reality it is a noticeable amount in the long term.
Differences between APY and APR
One of the main differences between the APR and the APY is the type of elabora used to calculate the percentages of earnings or amounts to be paid.
While the APY offers a more complete sum or result, since it takes capitalizations and compound interest into account, the APR is simpler.
Also, the APR tends to be frequently used by lending institutions or banks to let the borrower know the amount to be paid to acquire a loan.
And one of the differences that it possesses the APY of the aforementioned, is that it is used to calculate the earnings of an investment annual or savings.
Both are important concepts to know, as they will help you have greater control over your finances, agregado you will avoid paying plus money on loans and you will be able to correctly calculate the ROI of your investments.
We hope you liked our article APR and APY: what it is, differences and how to
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