Whether you’re saving money or borrowing it, you’ll probably hear the terms APR and APY. While they have some similarities, they apply to very different things.
APY is Annual Percentage Yield
APY refers to the amount you’ll earn on money that you save or invest over time. It includes compounding, which periodically adds the interest you earn into the amount on which future interest is calculated. The more frequent the compounding, the faster you’ll earn money. Interest can compound daily, monthly, or annually. The higher the APY, the better for you.
APR is an Annual Percentage Rate
APR can refer to both borrowing and saving money. With a loan or credit card, the APR reflects the basic interest rate plus additional repayment costs such as certain fees. The APR tells you how much you’ll pay to borrow the money, calculated across an entire year. This gives you a more complete picture of what you’ll end up paying over the life of the loan. The higher the APR, the more you’ll pay in interest.
With a savings or investment account, APR is the interest earned on the account without compounding. On Certificates you will often see both the APR and the APY - this tells you the interest rate you will earn on the Certificate - the APR - plus the rate you will earn after compound interest is calculated - the APY. So, if you’re comparing savings accounts or investment vehicles, you’ll want to compare the APY. This will tell you which type will help you earn the most amount of money over time.
What to Compare and When
If you’re planning to take out a loan or comparing credit cards, you’ll want to look closely at the APR to find the best rate for your needs.
While this can be confusing, online calculators will show you how interest rates and compounding affect your money to help you make the best choice.
Baltimore County Employees Federal Credit Union offers many savings and loan options to help you achieve your goals. Stop in a branch or contact us at 410-828-4730, 800-234-4730, or memberservices@bcefcu.com to learn more about how we can help you make your money work harder for you.