APY vs APR: What’s the Difference & Why it Matters?
Understandably, the acronyms APR and APY might need clarification by some. However, both are necessary for figuring out how much interest to pay on a loan or a savings account. Therefore, when they are included in your earnings or expenses, they may have a substantial impact.
However, despite their similarities in pronunciation, APR and APY are two very different and unrelated measures. In the first place, the difference between APY and APR is that APY considers compound interest, whereas APR does not.
What Is APY in Crypto?
The acronym APY means annual percentage yield. It is a frequent phrase in conventional finance and indicates the potential return on investment. Your crypto investment’s annualized rate of return which is expressed as a percentage per year (APY), considers compound interest earned on the principal and any interest accrued on principal balances. The term “compound interest” is used to describe the good that is accrued on both the initial payment and the interest.
Although the phrase yearly percentage return is more generally associated with more conventional forms of savings, it is nonetheless a crucial indicator for crypto-based alternative investments. In that respect, its operation is analogous to more traditional banking systems. As a result, there is an opportunity for investors to stake their cryptocurrencies and earn an annual percentage yield.
What Is APR in Crypto?
The annual percentage rate describes the potential financial gain for lenders that make their crypto tokens available in loans, factoring in interest rates and other fees paid by borrowers (APR). Numerous services entice users to stake their cryptocurrency by promising them high returns (APR). However, compounded interest is not factored into the APR.
You may only be able to borrow or lend cryptocurrency on some exchanges. However, there is considerable variation in the exchange rates offered by those that do. In addition, the interest you charge on a loan or lent cash varies greatly.
Differences Between APR and APY
Lenders on any platform or savers seeking the best return on their money will prioritize APY. It is because, with APY, interest may be compounded automatically. In contrast, if you’re on the borrower’s side of the table, you will want to search for the most affordable APR possible.
APRs are much less likely to fluctuate. But if you apply for a loan with an initial APR, you ought to understand how long it will continue and your costs after the introductory period finishes.
APY vs. APR
APY is preferable to APR in the vast majority of instances. For example, a one-year investment of $1,000 with a 2% APY)would net you $20. However, because APR doesn’t reasonably consider compound interest, you would only earn $16.66 if the asset had an APR of 2%.
Interest accrued on a cryptocurrency asset maintained in a credit facility is typically expressed as an annual percentage yield in the cryptocurrency industry. For example, if a lending platform offered a 10% APY, a deposit of 1 Bitcoin would yield a return of 10% per year.
But remember that APY can change as a result of market forces. If the value of Bitcoin increases by 10% over a year, for instance, a deposit of just 1 Bitcoin will be worth $10 more to you by the end of a year. Your deposit interest will grow in purchasing power as a result.
But if Bitcoin’s value drops, your interest earnings would be valued less in US Dollar terms. This is why evaluating APY rates against the market is essential. Knowing the interest rate and the total number of days in a year, you may compute the APY. This figure must then be multiplied by the total days the investment will be held.
Examples Of APY And APR Calculation
An example monthly interest rate from a credit card business could be 1%. Since 1% multiplied by 12 months yields 12% at an annual percentage rate, this is the total you may expect to pay. This is because APY takes compound interest into account, while APR doesn’t.
APY (12.68%) with a 2% interest rate if compounded monthly [(2 +0.02)12-1 = 12.78%]. Carrying a balance from one month to the following results in a 12% annual percentage rate charge. When carried over from month to month, though, that interest rate reaches 12.68 percent after a year.
The APY would become 5.116% if you invested $10,000 and compounded it monthly at 6%. Because it is repeated 12 times, it is not 6%. $10,000x(1+0.06)12/12=(12). After one year, your remaining balance would be around $10,611.60.
With a 6.126% APY and daily compounding, your total amount will be $1612.70 after a year. To do the math, consider the following: 10,000×1(1+ 0.06 ÷ 365)^(356). (365).
How To Compare Different Interest Rates
The question of cryptocurrency interest rates will rise in prominence as crypto lending services expand. What we call “interest” is just the price of taking loans.
📌Fixed Vs.Variable Interest Rates
Interest rates from financial institutions can be either fixed or variable. With a fixed-rate loan, your interest rate will never change during the term of the loan, and your first payments will go mainly toward the interest accrued. However, the original loan amount that you owe will grow over time despite your payments. Any debt instrument not tied to a fixed interest rate is subject to a variable rate that fluctuates with the prime rate.
📌High Vs. Low-Interest Rates
Loan costs will increase if interest rates are high. High-interest rates can make borrowing difficult for both consumers and corporations. A decrease in consumer demand may result from decreased spending due to a shortage of available credit.
However, when rates are low, people are more likely to want to make substantial financial investments like buying a home. In addition, business loans are more accessible when interest rates are low, and the advent of new companies raises hopes for creating new jobs.
Understanding both APY and APR are crucial for successful financial planning. This is because the spread between the annual percentage rate and annual percentage yield grows as compounding frequency rises.