What’s the Difference Between APY and APR?

Annual Percentage Yield (APY) is the yearly rate of return on investments. Annual Percentage Rate (APR) typically represents the cost of borrowing money – or the rate of interest accrued on loans each year. From a consumer perspective, you’ll see APY associated with things like savings accounts, checking accounts or share certificates and APR on your auto loan, mortgage or credit card debt.

Although both APY and APR are measures of interest, APR can incorporate other costs, like fees. Various origination or management fees are broken up and spread over the life of the loan by dividing the fees by the number of payment periods.

From a borrower’s perspective, it’s often preferable to just have those added fees rolled into your monthly interest and principal payments rather than having to pay a large lump sum once a year or at the start or end of the loan.

APY doesn’t incorporate any kind of fees like this, so the APY you see associated with a savings product is purely the yield (annual interest earned) of the account.

The Similarities and Differences Between APR and APY

Although APR and APY are used for opposing purposes, there are some significant similarities in terms of function and calculation. Maybe the most obvious similarity is the first word: annual. They provide a standardized way to represent the yearly cost of a loan (APR) or the annual earnings on an investment, savings or checking account (APY).

APY reflects the total amount of interest the balance of an account will earn through compounding interest. Compounding occurs when the interest earned is added to the principal, and future interest calculations are made using the increased balance.

APR uses a simple interest calculation rather than a compounding interest calculation. The principle of a loan and the interest is divided into however many payments are required to pay off the amount within the loan term, or the life of the loan. The breakdown of interest and principal in each payment can be found in the loan’s amortization schedule. At the start of the loan, when the interest on the loan is much larger than the principal, most of your payment will go toward interest.

Knowing the principal, rate and term allows you to see the exact amortization schedule before you ever sign any loan papers. APY is a bit less predictable because the amount of money you invest or save isn’t set at the very start, except in the case of share certificate or certificate of deposit products.

Compounding frequency varies, with savings or checking accounts potentially having daily compounding, monthly compounding, quarterly compounding, semiannual compounding (twice per year) or annual compounding. The interest is calculated based on the balance of the account at the time of compounding.

Daily compounding is best for savers since the daily interest will be calculated and added quickly for new deposits. Frequent compounding is most impactful if you’re regularly making deposits.

Strategies to Make the Most of High-Yield Savings and Checking Accounts

• Maintain Higher Balances: Higher account balances usually earn more interest. If possible, maintain a higher balance in your savings account to take advantage of the compound interest.
• Regular Deposits: Make regular contributions to your savings account. Even small, consistent deposits can add up over time, especially with frequent compounding.
• Automatic Savings Plans: Set up automatic transfers from a low-yield checking to a high-yield savings or checking account. Automating transfers can help build the account balance consistently without you needing to remember each month.
• Avoid Withdrawals: Minimize withdrawals from your high-yield accounts. The more you withdraw, the less principal you have earning interest every time compound interest is calculated and added.
• Take Advantage of Special Savings Programs: Some banks offer special programs or bonus rates for certain types of savings or checking accounts or under certain conditions. For example, OnPath Credit Union’s high-yield checking account has a seven percent APY on balances up to $10,000.
• Ladder Share Certificates: If you're considering share certificates (or CDs), look into share certificate ladder strategies. This involves opening multiple share certificates with different maturity dates, allowing you to benefit from higher rates on longer-term share certificate rates while maintaining liquidity.

Maximize Your Wealth Generation With Industry-Leading APYs and Affordable APRs

At OnPath Credit Union, we’re committed to providing banking solutions that meet the needs of our New Orleans neighbors. This includes competitive rates on all types of loans as well as great yields on savings, checking and share certificate accounts. Learn more about our saving options and loans by calling us at 800.749.6193.