APY vs. APR: Spending or Saving?

If you have been in the market for loans or credit cards or recently opened a savings account or Certificate of Deposit (CD), you have definitely come across the acronyms APR and APY. 

But what do these terms mean exactly, and why are they important? 

They both have to do with interest rates but knowing how APR and APY differ can help Georgia United members and prospective members make smart money management decisions. And while these two terms sound and look similar, their meanings and impacts on your personal finances are quite different.  

WHAT’S IN A NAME?                                                                                                                                    

First things first, what are these acronyms abbreviations for? 

APR stands for annual percentage rate. This is the total yearly cost of borrowing money, represented as a percentage. Do not confuse APR with the interest rate, however. APR is usually higher than the interest rate, because it includes the interest rate plus any additional fees and charges you will pay on an account, such as escrow or origination fees on a mortgage.   

Lenders are required by the Truth In Lending Act to provide true loan costs to facilitate comparison shopping by consumers. And credit card companies are required to disclose the APR before a card is issued – that way, you know what you’re getting into and won’t be surprised when the bill arrives. It is important to note Georgia United credit cards also have variable rates that are subject to change.

Meanwhile, APY stands for annual percentage yield. It is the rate of yearly return and gives you the most accurate picture of an account’s earning potential.  

The higher the APY, the faster your money will grow. If you have the financial flexibility to leave some savings funds alone for a specified time frame, then locking in a CD may be a good option for you as CDs typically have higher return rates (APYs) than checking or savings accounts. 

THE BIG DIFFERENCE 

APR represents the total annual cost of borrowing, whereas APY is the total amount of money you can earn on a savings account with compound interest (which can be set at various types of frequencies, including daily, monthly, quarterly, or semi-annually, etc.).

“Basically, one you pay, and one you earn,” said Amanda Whitson, Georgia United’s senior vice president of consumer lending. “It breaks down to spending versus saving – that’s the easiest way to think about it.” 

You could also think about it in terms of bowling versus golf: At the alley, you want the highest score possible, out on the fairways, you want the lowest score possible. When it comes to APR, you want the number to be low – and in general, a better credit score will qualify for a lower APR. The higher the APY, on the other hand, the greater your earning potential. 

There is no better time than the present to reexamine the APY that you are receiving on your deposit accounts and do some comparison shopping to see if Georgia United can help you earn more money. And the same can be said for refinancing loans, it is always a good idea to periodically check your interest rates.

To schedule an in-person or phone appointment with a Georgia United financial professional, click here. 

There are more details involved with both APR and APY, but understanding the basics discussed here will help you make smarter financial decisions and grow your wealth.