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Understanding APR vs. APY

Posted by McDonald & Osborne Posted on Oct 13 2015

Do you know the difference between and Annual Percentage Rate (APR) and Annual Percentage Yield? You should. 20Somethingfinance.com breaks it down and explains how your knowledge on this topic could be the difference in getting a deal and getting scammed. Read “ Interest Rates: APR vs APY (and why it Matters) .”

An annual percentage rate (APR) is known as a “nominal rate,” or the percentage of interest you pay in a given year when the interest rate is only compounded on an annual basis. However, most banks and other lenders charge interest on loan or pay interest on CDs on a daily, monthly, or quarterly basis. For this reason it is also important to know about annual percentage yields (APY) . An annual percentage yield is also known as the “effective rate.” This is the rate you pay on an annual basis once compounding factors are added to the equation. (See the article mentioned above for detailed calculations and examples.) You’ll see how the effective rate on a credit card quoted as a 12% APR is really 12.68% if compounded monthly and 12.74% when compounded daily.

Please share with your friends and family. Don’t fall for a “deal” that ends up being a “dud.” Having a basic knowledge of personal finance rules and jargon can save you a fortune! Continue to educate yourself and as always, give us a call if you think we can be of any assistance.

Stephen Osborne
Accountant
sosborne@mo-cpa.com

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