Michael on August 3rd, 2007
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You: What the heck are APR and APY?

APR is the abbreviation for annual percentage rate. APY stands for annual percentage yield.

You: Do you really think that helped?

Perhaps not.

You: So you’re going to make me ask?

Ask what?

You: What’s the freakin’ difference between APR and APY?

Well, it is a good question.

You: Thanks. How about answering it then?

Wake up on the wrong side of the bed?

You: No. It’s just that yesterday was payday and now that I’m living Beyond Paycheck to Paycheck, I am less amused by the aggressive tactics of a man named FICA taking all this money out of my paycheck.

You do realize FICA isn’t actually a man?

You: Yeah, with the amount he takes, I hope it’s a whole bunch of people.

Ah, but that’s a conversation for another day. Let’s get back to the APR and APY you were asking about.

How could two abbreviations sound so similar and have such different meanings? Perhaps to cause confusion? Remember, whenever you don’t understand the difference, others can benefit.

You: Enough with the conspiracy theory.

APR is the interest rate you are charged or earn without taking the frequency of compounding into account. The rate of compounding can range from daily to yearly. The more frequently your interest compounds, the more important and dramatic the difference between APR and APY. APY takes into account the frequency of compounding, and is the rate upon which you should focus.

You: So why bother with APR at all?

Don’t. Just focus on APY.

You: Whether I am borrowing or saving?

Either way, because APY is what most closely represents the true financial situation of whatever you’re contemplating doing (borrowing or saving).

You: That seeems pretty easy.

Because it is. I’m not trying to confuse, I’m trying to clarify and personal finance isn’t that hard.

Gary: It can be if you’re not careful. That’s why you need an advisor who–

–is nothing like you.

Stay cool.

You: APY it is.

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