The differences between APR vs. APY aren't as complicated as you may think – APR represents the yearly interest rate on loans or credit, while APY considers compounding interest and reflects the effective interest earned each year.
Both terms deal with interest and its calculation, but they’re different in some key ways. And if you plan to invest in Canada, you'll need to understand these key differences.
We explain the differences between APR and APY, and how to calculate each rate below.
Key Takeaways
- APR stands for annual percentage rate and refers to the annual interest you pay on a loan.
- APY refers to the annual percentage yield and includes compounding interest – this is important for understanding your true earnings.
- The biggest difference to remember is that APR doesn’t include compounding in its calculation, but APY does.
APR vs. APY explained
APR and APY are commonly written as percentages and both rates give you a more accurate idea of what you’re paying or receiving in interest.
The main difference between APR and APY is that APR doesn’t include compounding in its calculation, but APY does. For this reason, APY will usually be higher than APR.
What is APR?
APR stands for annual percentage rate and refers to the annual interest you pay on a loan. This could be for a personal loan, mortgage, credit card, or something similar. People often confuse the term, but APR includes both the interest rate and extra fees paid on the loan – it does not refer to the interest rate alone.
Here's an example:
- Suppose you borrow $10,000 at 13% for 3 years to buy a new car.
- The lender also has to pay a fee to access your credit report and register the lien on the vehicle and they add these charges – about $600 – to your loan.
- The APR now includes the $10,000 loan, 13% interest rate, and the additional $600 in charges. This raises the total principal amount that you have to pay interest on.
What is APY?
APY refers to the annual percentage yield and includes compounding interest. It's most often used to measure the return on investment, but it can be used for credit as well.
Using the same loan example above, the APY calculation would include the $10,000 loan, the 13% interest rate, the $600 fees added to the loan, and the number of times interest is compounded.
Let's consider a different example, one that's more investment-focused:
- Let’s say you invest $10,000 in a 2-year GIC.
- It has a 5% interest rate and this is compounded semi-annually.
- Your APY in the 2nd year would include the original $10,000 investment, the interest earned in the 1st year, and the 5% interest rate.
- Therefore, the APY would be a bit higher than 5%.
How to calculate APR vs. APY
So, how exactly do you calculate APR and APY? Here are the formulas to use when making your calculations.
APR and APY calculator
The formula to calculate APR is:
[(Interest + Total fees / Loan amount) / Number of days in loan term] x 365 x 100
The formula to calculate APY is:
(1 + interest rate / number of compounding periods)^n – 1
APR vs. APY example
To calculate the APR, you first must calculate the loan’s interest. You do this by using this formula:
A = P (1 + RT)
This means:
- A = total accumulated amount
- P = principal
- R = interest rate
- T = time period
In our GIC example, the APY is:
[(0.13 + $600 / $10,000) / 1,095] x 365 x 100 = 6.33%
Using the example of a 3-year GIC at 5% with interest compounded semi-annually and the formula above, the APY is:
(1 + 0.05 / 4) ^ 4 – 1 = 5.0625%
APY for savings accounts
APY factors into how you make money with a high interest savings account too. The Motive Savvy Savings Account, for example, offers 2% interest on their savings account. The interest is calculated daily, paid monthly, and is an annual rate.
If you deposit $1,500.00 in this Motive account and leave it for a year with no additional deposits, you'll end up with $1,562.67 when the year is up. Your APY will be 4.17%.
Learn more about Motive Savvy Savings Account here:
The Motive Savvy Savings Account is pretty basic as far as features go – but it makes up for it with its high interest rate and overall lack of fees. Currently at 2%, this is one of the best high interest savings accounts you can get right now in Canada.
- A high 2% interest rate
- Unlimited transactions and Interac e-Transfers
- Application requires a hard credit check
- Unavailable in Quebec
- Valuable high interest rate
APY and compound interest
Earning interest on your interest means you’ll receive a higher rate. Most savings accounts deposit the interest into your account each month. The interest becomes part of your account balance, and as a result, it also earns interest.
The effect of APR vs. APY
The APR usually means you’re paying more than the interest stated if fees and additional charges are added to the loan.
On the other hand, the APY means you’ll receive more interest if your investment calculates interest frequently, such as monthly or quarterly.
Have you ever been pleasantly or otherwise surprised when you saw the APR or APY you were paying or receiving?
Please let us know your thoughts and experiences with APR and APY.
FAQ
What is the difference between APR vs. APY?
APR (annual percentage rate) is the interest rate on a loan per year. APY (annual percentage yield) includes compound interest, which indicates the actual return on savings or investments annually. APY is crucial for understanding true earnings.
How do you calculate APR vs. APY?
First, calculate the loan’s interest, then find APR with this formula: [(Interest + Total fees / Loan amount) / Number of days in loan term] x 365 x 100. APY is calculated using this formula: (1 + Interest rate / Number of compounding periods)^n-1.
What is the highest APY savings account?
At the time of writing, Simplii High Interest Savings Account has a max rate of 1.5%. A couple other high yield accounts include: KOHO Earn Interest at 3.5% and Motive Savvy Savings Account with a 2% rate.
What is APR vs. APY in crypto?
APR typically refers to interest earned or paid on assets like staking. APY accounts for compounding, offering a more accurate reflection of overall returns. APY may be higher in crypto than in regular investments, but it fluctuates with the market.
What is a good APR rate?
This depends on the type of loan you're considering. For credit cards, a good APR is below 20%, but anything below 4% is considered favourable for mortgages. For personal loans, it can vary but typically under 10% is decent.
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