APY vs APR: Which indicator to choose for your investments? 🧐

When looking for the best investment opportunities or loans, we almost always come across two mysterious abbreviations: APR and APY. Although they sound similar and both relate to interest rates, they serve completely different roles in the world of finance. Understanding the differences between them can significantly impact your profits – or costs. Are you wondering why sometimes the interest rate offered by a bank differs from your actual earnings? The answer lies precisely in these two concepts.

APR – where does it really start? 💭

Before comparing different financial products, you need to know what APR (annual percentage rate) is. It is the simplest way to express interest rates – showing how many percent of the principal amount you will pay or earn over one year.

APR completely omits the effect of compound interest. If you borrow 1000 PLN at 10% APR, you will pay exactly 100 PLN in interest – nothing more, nothing less. This simple math makes APR transparent and easy to calculate, but it can also be misleading.

Where do you encounter APR in practice? Mainly with credit cards, where the bank clearly states: “Interest rate 25% APR.” Similarly, in consumer and mortgage loans – this rate is usually provided by default. For lenders, APR is convenient because it sounds less intimidating than the actual cost.

APY / APR – what changes when interest is compounded? 🪫

Now it’s time for APY (annual percentage yield), sometimes written as small, which is the annual return rate. It is a much more realistic reflection of how much you will actually earn on an investment.

The difference is that APY accounts for the effect of compound interest. Interest accrued during the year does not disappear – it is added to your principal, and then subsequent interest is calculated on this increased amount. The effect is like an avalanche – the more frequent the capitalization, the faster your capital grows.

Imagine a savings account with an annual APY of 5%, where interest is compounded monthly. In the first month, you will earn about 0.41% on the principal. But in the second month, not just that – you will earn 0.41% on the principal PLUS 0.41% on the interest earned in the first month. It may seem small, but by the end of the year, the difference between APR and APY can be several tens of percent in your favor.

Where do you most often encounter APY? In investment products – savings accounts, funds, and especially in crypto with staking or liquidity mining. Banks and investment platforms disclose APY precisely to show you the real return on investment.

Real-world example: Why don’t the numbers match? 🔋

Suppose a bank offers two investment options of 1000 PLN for a year:

Option one: Credit card with 20% APR. You will pay exactly 200 PLN in interest.

Option two: Investment account with 20% APY, where interest is compounded monthly. You will earn not 200 PLN, but as much as 219 PLN – almost 10% more! That’s the magic of compound interest.

What if the compounding was daily instead of monthly? The difference would be even greater – you could approach 221 PLN.

How to choose the right indicator for yourself? 🖊️

Before deciding on an investment or loan, remember:

When to pay attention to APR:
When evaluating costs – loans, credit cards, or obligations. Here, APR is the industry standard and you should compare it across different offers.

When to look for APY:
When choosing where to put your money – savings accounts, certificates, or crypto investments. APY will show you the actual return considering compound interest.

Golden rule:
When interest is compounded more than once a year, the difference between APR and APY becomes significant. Monthly – already noticeable. Daily – spectacular.

In summary: APR is a simplified, theoretical rate, while APY reflects the reality you will see on your account. If you want to make smart financial decisions, don’t ignore the impact of compound interest – that’s why millions of people choose investments based on APY instead of blindly trusting APR.