APY vs Interest Rate: Breaking Down the Difference

APY vs Interest Rate: Breaking Down the Difference

APY vs Interest Rate: Breaking Down the Difference

APY vs Interest Rate: Breaking Down the Difference

August 17, 2023

August 17, 2023

August 17, 2023

August 17, 2023

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APY vs Interest Rate
APY vs Interest Rate
APY vs Interest Rate

Terms like “Interest Rate” and “Annual Percentage Yield (APY)" come up quite often in the world of finance. Whether you're looking to open a new high yield savings account, invest in a Certificate of Deposit, or even take out a loan, understanding the nuances between these two can mean the difference between earning more on your investments or paying less on your borrowings. Read on to learn the differences between APY and Interest Rates to help you make informed decisions for future investments.

What Is An Interest Rate And How Does It Work?

An Interest Rate is the percentage of the initial amount of money deposited that a financial institution pays to its depositors. When one is borrowing money, the interest rate is the percentage of how much a lender charges for using their money. In other words, it’s the cost of borrowing or the reward for saving.

Terms like “Interest Rate” and “Annual Percentage Yield (APY)" come up quite often in the world of finance. Whether you're looking to open a new high yield savings account, invest in a Certificate of Deposit, or even take out a loan, understanding the nuances between these two can mean the difference between earning more on your investments or paying less on your borrowings. Read on to learn the differences between APY and Interest Rates to help you make informed decisions for future investments.

What Is An Interest Rate And How Does It Work?

An Interest Rate is the percentage of the initial amount of money deposited that a financial institution pays to its depositors. When one is borrowing money, the interest rate is the percentage of how much a lender charges for using their money. In other words, it’s the cost of borrowing or the reward for saving.

If you have a savings account or Certificates of Deposit (CDs) at a bank, the interest rate indicates the return on investment (ROI) you can expect over time. Let’s say you deposited $10,000 into a savings account that had a 4.20% interest rate. After one year, the amount of interest you would earn would be $420 ($10,000 x 4.20% = $420).

On the other hand, when taking out a loan, the interest rate determines the cost for the money you’re borrowing. If we look at the numbers from above, if you had to pay 4.20% on $10,000 of what you borrowed, you would have to pay $420 in interest. While this rate can be affected by various external factors, it serves as the foundational element for more complex financial metrics, such as the Annual Percentage Yield (APY) or the Annual Percentage Rate (APR).

What Is An Interest Rate

What Is APY And How It Works 

Annual Percentage Yield (APY) is the rate of return earned on an investment or savings account over a specified period, usually a year, including compounding interest. When compared to the basic interest rate, APYs provide a much clearer picture of your potential earnings or costs.

Since APY factors in the frequency of compounding interest, it offers a more accurate measure of the total yield over a year. In simpler terms, it reveals how often interest is added to the principal(the amount of money in the account at that given time). 

For instance, in a savings account or CD, the APY indicates the actual percentage you'd earn or receive annually, taking into account the compounding frequency, whether it’s monthly, quarterly, or daily. The more frequent that your interest compounds, the higher your APY will be. 

If your $10,000 deposit from the prior example earned a 4.20% APY on a 2 year term and compounded monthly, your final balance in the account after 2 years would be $10,857.64. The total amount of money that you would’ve earned would be $857.64. Year 1= ($10,000 x 4.20% = $420)   Year 2= ($10,420 x 4.20% = $437.64) Total earnings = $857.64

Always remember, a higher APY in savings means more earnings, making it an essential metric to consider for optimizing financial gains.

What Is APY

If you have a savings account or Certificates of Deposit (CDs) at a bank, the interest rate indicates the return on investment (ROI) you can expect over time. Let’s say you deposited $10,000 into a savings account that had a 4.20% interest rate. After one year, the amount of interest you would earn would be $420 ($10,000 x 4.20% = $420).

On the other hand, when taking out a loan, the interest rate determines the cost for the money you’re borrowing. If we look at the numbers from above, if you had to pay 4.20% on $10,000 of what you borrowed, you would have to pay $420 in interest. While this rate can be affected by various external factors, it serves as the foundational element for more complex financial metrics, such as the Annual Percentage Yield (APY) or the Annual Percentage Rate (APR).

What Is An Interest Rate

What Is APY And How It Works 

Annual Percentage Yield (APY) is the rate of return earned on an investment or savings account over a specified period, usually a year, including compounding interest. When compared to the basic interest rate, APYs provide a much clearer picture of your potential earnings or costs.

Since APY factors in the frequency of compounding interest, it offers a more accurate measure of the total yield over a year. In simpler terms, it reveals how often interest is added to the principal(the amount of money in the account at that given time). 

For instance, in a savings account or CD, the APY indicates the actual percentage you'd earn or receive annually, taking into account the compounding frequency, whether it’s monthly, quarterly, or daily. The more frequent that your interest compounds, the higher your APY will be. 

If your $10,000 deposit from the prior example earned a 4.20% APY on a 2 year term and compounded monthly, your final balance in the account after 2 years would be $10,857.64. The total amount of money that you would’ve earned would be $857.64. Year 1= ($10,000 x 4.20% = $420)   Year 2= ($10,420 x 4.20% = $437.64) Total earnings = $857.64

Always remember, a higher APY in savings means more earnings, making it an essential metric to consider for optimizing financial gains.

What Is APY

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Simple Vs Compound Interest

Now that you have a better understanding of interest rate vs APY, it’s good to know how compound interest differs from simple interest. The latter is the amount of interest earned off of only the principal. Compound interest takes into consideration the interest earned on the principal as well as any accumulated interest. With compound interest, the longer the money remains in that account, the more interest you’ll earn each year. 

Simple Vs Compound Interest

Breaking It Down

At a glance, interest rate and APY might seem interchangeable, but they serve unique roles. In essence, while the interest rate sets the stage, APY plays out the entire performance, offering a full view of the financial implications. 

When looking at the two examples from before, a $10,000 deposit in a savings account that pays 4.20% interest rate would earn $840 after 2 years. The same amount of money earned $857.64 in an account with a 4.20% APY and was compounded monthly. 

Being able to distinguish between APY vs Interest Rates will ensure more accurate and informed decision-making in banking and investment scenarios.

Breaking Down APY vs Interest Rate

Make More Informed Decisions: Interest Rate vs APY

Now that you know the difference between APV vs Interest Rate, take a look at your savings to make sure you’re maximizing your ROI. APY’s help you better gauge your return on investment because they provide a more comprehensive view on your money. With that being said, it’s better to know APY when it comes to savings accounts. 

And if you're considering loans, don't just glance at the interest rate – delve into the APY to understand the real borrowing cost. Remember, in the world of banking and finance, a well-informed decision can mean the difference between fruitful gains and avoidable losses.

Simple Vs Compound Interest

Now that you have a better understanding of interest rate vs APY, it’s good to know how compound interest differs from simple interest. The latter is the amount of interest earned off of only the principal. Compound interest takes into consideration the interest earned on the principal as well as any accumulated interest. With compound interest, the longer the money remains in that account, the more interest you’ll earn each year. 

Simple Vs Compound Interest

Breaking It Down

At a glance, interest rate and APY might seem interchangeable, but they serve unique roles. In essence, while the interest rate sets the stage, APY plays out the entire performance, offering a full view of the financial implications. 

When looking at the two examples from before, a $10,000 deposit in a savings account that pays 4.20% interest rate would earn $840 after 2 years. The same amount of money earned $857.64 in an account with a 4.20% APY and was compounded monthly. 

Being able to distinguish between APY vs Interest Rates will ensure more accurate and informed decision-making in banking and investment scenarios.

Breaking Down APY vs Interest Rate

Make More Informed Decisions: Interest Rate vs APY

Now that you know the difference between APV vs Interest Rate, take a look at your savings to make sure you’re maximizing your ROI. APY’s help you better gauge your return on investment because they provide a more comprehensive view on your money. With that being said, it’s better to know APY when it comes to savings accounts. 

And if you're considering loans, don't just glance at the interest rate – delve into the APY to understand the real borrowing cost. Remember, in the world of banking and finance, a well-informed decision can mean the difference between fruitful gains and avoidable losses.

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Hiatus has partnered with AmONE for our coverage of personal loan products. Hiatus and AmONE may receive compensation when you click on links associated with personal loan products. In certain situations, compensation may impact where products appear on the site (including the order in which they appear). AmONE does not include all loan companies or all types of loan products.


You are being referred to ADVR LLC’s website ("Advisor") by Hiatus, a solicitor of Advisor ("Solicitor"). The Solicitor that is directing you to this webpage will receive compensation from Advisor if you enter into an advisory relationship or into a paying subscription for advisory services. Compensation to the Solicitor may be up to $2,000. You will not be charged any fee or incur any additional costs for being referred to Advisor by the Solicitor. The Solicitor may promote and/or may advertise Advisor’s investment adviser services and may offer independent analysis and reviews of Advisor’s services. Advisor and the Solicitor are not under common ownership or otherwise related entities. Additional information about Advisor is contained in its Form ADV Part 2A available here.

© 2023 Hiatus, Inc. All rights reserved

© 2023 Hiatus, Inc. All rights reserved

Advertiser Disclosure:


Hiatus may receive compensation when you click on links associated with this Hiatus Learn Center. Hiatus is not being compensated for any application, quotation, or the purchase of any financial products.


Hiatus has partnered with MyBankTracker for our coverage of savings account products. Hiatus and MyBankTracker may receive compensation from advertisers when you click on links associated with these savings account products. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MyBankTracker does not include all companies or all savings products. 


Hiatus has partnered with CardRatings for our coverage of credit card products. Hiatus and CardRatings may receive a commission from card issuers. Opinions, reviews, analyses & recommendations are Hiatus' alone, and have not been reviewed, endorsed or approved by any of these entities.


Hiatus is not an insurer or insurance producer. Savvy is the licensed insurance producer supporting the Hiatus/Savvy program. All insurance information and underwriting is provided by Savvy and its licensed insurance partners.


Hiatus has partnered with AmONE for our coverage of personal loan products. Hiatus and AmONE may receive compensation when you click on links associated with personal loan products. In certain situations, compensation may impact where products appear on the site (including the order in which they appear). AmONE does not include all loan companies or all types of loan products.


You are being referred to ADVR LLC’s website ("Advisor") by Hiatus, a solicitor of Advisor ("Solicitor"). The Solicitor that is directing you to this webpage will receive compensation from Advisor if you enter into an advisory relationship or into a paying subscription for advisory services. Compensation to the Solicitor may be up to $2,000. You will not be charged any fee or incur any additional costs for being referred to Advisor by the Solicitor. The Solicitor may promote and/or may advertise Advisor’s investment adviser services and may offer independent analysis and reviews of Advisor’s services. Advisor and the Solicitor are not under common ownership or otherwise related entities. Additional information about Advisor is contained in its Form ADV Part 2A available here.

© 2023 Hiatus, Inc. All rights reserved

Advertiser Disclosure:


Hiatus may receive compensation when you click on links associated with this Hiatus Learn Center. Hiatus is not being compensated for any application, quotation, or the purchase of any financial products.


Hiatus has partnered with MyBankTracker for our coverage of savings account products. Hiatus and MyBankTracker may receive compensation from advertisers when you click on links associated with these savings account products. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MyBankTracker does not include all companies or all savings products. 


Hiatus has partnered with CardRatings for our coverage of credit card products. Hiatus and CardRatings may receive a commission from card issuers. Opinions, reviews, analyses & recommendations are Hiatus' alone, and have not been reviewed, endorsed or approved by any of these entities.


Hiatus is not an insurer or insurance producer. Savvy is the licensed insurance producer supporting the Hiatus/Savvy program. All insurance information and underwriting is provided by Savvy and its licensed insurance partners.


Hiatus has partnered with AmONE for our coverage of personal loan products. Hiatus and AmONE may receive compensation when you click on links associated with personal loan products. In certain situations, compensation may impact where products appear on the site (including the order in which they appear). AmONE does not include all loan companies or all types of loan products.


You are being referred to ADVR LLC’s website ("Advisor") by Hiatus, a solicitor of Advisor ("Solicitor"). The Solicitor that is directing you to this webpage will receive compensation from Advisor if you enter into an advisory relationship or into a paying subscription for advisory services. Compensation to the Solicitor may be up to $2,000. You will not be charged any fee or incur any additional costs for being referred to Advisor by the Solicitor. The Solicitor may promote and/or may advertise Advisor’s investment adviser services and may offer independent analysis and reviews of Advisor’s services. Advisor and the Solicitor are not under common ownership or otherwise related entities. Additional information about Advisor is contained in its Form ADV Part 2A available here.

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Advertiser Disclosure:


Hiatus may receive compensation when you click on links associated with this Hiatus Learn Center. Hiatus is not being compensated for any application, quotation, or the purchase of any financial products.


Hiatus has partnered with MyBankTracker for our coverage of savings account products. Hiatus and MyBankTracker may receive compensation from advertisers when you click on links associated with these savings account products. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MyBankTracker does not include all companies or all savings products. 


Hiatus has partnered with CardRatings for our coverage of credit card products. Hiatus and CardRatings may receive a commission from card issuers. Opinions, reviews, analyses & recommendations are Hiatus' alone, and have not been reviewed, endorsed or approved by any of these entities.


Hiatus is not an insurer or insurance producer. Savvy is the licensed insurance producer supporting the Hiatus/Savvy program. All insurance information and underwriting is provided by Savvy and its licensed insurance partners.


Hiatus has partnered with AmONE for our coverage of personal loan products. Hiatus and AmONE may receive compensation when you click on links associated with personal loan products. In certain situations, compensation may impact where products appear on the site (including the order in which they appear). AmONE does not include all loan companies or all types of loan products.


You are being referred to ADVR LLC’s website ("Advisor") by Hiatus, a solicitor of Advisor ("Solicitor"). The Solicitor that is directing you to this webpage will receive compensation from Advisor if you enter into an advisory relationship or into a paying subscription for advisory services. Compensation to the Solicitor may be up to $2,000. You will not be charged any fee or incur any additional costs for being referred to Advisor by the Solicitor. The Solicitor may promote and/or may advertise Advisor’s investment adviser services and may offer independent analysis and reviews of Advisor’s services. Advisor and the Solicitor are not under common ownership or otherwise related entities. Additional information about Advisor is contained in its Form ADV Part 2A available here.

© 2023 Hiatus, Inc. All rights reserved