Comments on: Converting APR to APY, What’s The Difference?

By: tyler

tyler — Thu, 02 Apr 2009 13:59:42 +0000

ok…im in a personal finance class right now and they dont advertise a certain rate apr or apy…either way you start with apy and end up with apy….and the calculation is M=principal(1+interest/number of compounds)to the compounds power.

By: Scott

Scott — Mon, 29 Sep 2008 18:07:24 +0000

Not exactly, I don’t think… APR and APY really don’t have anything to do with each other as commonly used in the banking industry. APY is used to give a rate for comparison of deposit products and the APR is used for comparing loan products. You are correct that the APY on deposit products is affected primarily by compounding methods and periods. The APR on loan products incorporates many other factors to give the true cost of a loan product and is much more complicated.

I believe your statement about banks advertising one rate (APR) for loans and one rate (APY) on loans is simply incorrect. Banks generally advertise an interest rate for deposits and a rate for loans…neither APY nor APR as the terms are properly used. They then disclose either an APY (for deposits) and an APR (for loans) as required by regulation for comparison purposes.

I may be off a little on this, but you may want to do a little further research to make sure what you’re saying here is accurate. Thanks. I enjoy your blog.

By: byikes

byikes — Fri, 26 Sep 2008 00:14:41 +0000

I think the APR from APY, needs a -1 at the end of the first line
Periodic Rate = ((APY + 1)^(1 / Periods)) -1

By: fred@opc

fred@opc — Thu, 25 Sep 2008 21:07:17 +0000

Jim – Thanks for the explanation. Question for you: Is mortgage interest normally quoted as APR or APY, and how often is mortgage interest compounded?