When researching financial products, you’ll likely see terms like APY and APR. If you don’t know what these terms mean, it can be challenging to understand the difference these values can have on your finances.

These terms, Annual Percentage Yield and Annual Percentage Rate, are two basic fiscal terms to have in your financial knowledge toolbox. If you’re a busy doctor needing a quick explanation of the two, you’ve come to the right place. Let’s take a quick look at APY vs. APR.

What is APY?

Annual Percentage Yield (APY) is the measure of the return on an investment expressed as a yearly percentage. This metric takes into account the impact of compounding interest, which is the interest earned on both the initial principal and the accumulated interest from previous periods.

What makes up APY?

• Interest rate: This is the nominal rate of interest on the investment.
• Compounding frequency: This is how often the interest is compounded (daily, monthly, quarterly, annually)

What financial products use APY?

APY is used for financial products that earn interest, including:

• Savings accounts
• Certificates of deposit
• Money market accounts

How to calculate APY

The formula for APY is:

APY = (1 + (r/n))ⁿ – 1

Where:

• R is the nominal interest rate or the stated annual interest rate.
• N is the compounding frequency or the number of times interest is compounded per year.

Example

1. Loan details:
   
   • Nominal interest rate: 5% (or 0.05 as a decimal)
   • Compounding frequency: monthly

2. Calculate APY

APY = (1 + (0.05/12))¹² – 1
APY = (1 + (0.004167))¹² – 1
APY = (1.004167)¹² – 1
APY = 1.05116 – 1
APY = 0.05116
APY = 0.05116 x 100 = 5.116%
APY = 5.116%

Learn more about APY and how it differs from interest rate.

What is APR?

Annual Percentage Rate (APR) is a measure of the cost of borrowing money expressed as a yearly interest rate. This measurement represents the annual cost of a loan to a borrower, including interest and any additional fees or charges.

Consumers can use APR to compare different lending options because it is a standardized measure to compare the cost of borrowing. For doctors, this might mean a loan to pay for residency relocation expenses, a mortgage once you’ve accepted your first job, or even practice financing when you are ready to venture out on your own.

What is included in APR calculations?

• Interest rate: The main component of APR is the interest rate charged on the loan amount.
• Fees and additional costs: APR also includes fees and other charges associated with the loan. This could include:
  
  • Loan origination fees
  • Broker fees
  • Closing costs

What financial products use APR?

All loan types use APR to represent the cost of borrowing money. This includes financial products like:

• Mortgages
• Car loans
• Personal loans
• Credit cards

How to calculate APR

The formula for APR is:

APR = ((total interest paid + fees)/loan amount) x (number of payment periods in a year/number of payment periods) x 100

Example

1. Loan details:
   
   • Loan amount: $10,000
   • Nominal interest rate: 5% per year
   • Loan term: 1 year
   • Additional fees: $200

2. Calculate total interest paid

Interest paid: 10,000 x 0.05 = $500

3. Calculate total cost

Total cost: $500 (interest) + $200 (fees) = $700

4. Calculate APR

APR = (700/10,000) x (12/12) x 100
APR = (0.07) x 100
APR = 7%

What is the difference between APY and APR?

Both APY and APR are measurements used for financial products, but they have many differences including:

• Purpose: APR is used to represent the interest a borrower will pay on their loan in a year. APY is used to represent the interest an individual will earn in one year.
• Compounding: APR does not take compounding into account. It is a simple interest rate and could underestimate the true cost of borrowing if interest compounds. APY includes compounding, providing a more accurate reflection of potential earnings.
• Fees: APR calculations include fees, while APY rates don’t include any fees.
• What you should look for: When you are comparing financial products, you should look for different things depending on the use of APR or APY. For APR-based comparisons, lower APR rates are typically better. For APY-based decisions, higher APY rates are more favorable.

Researching loans and deposit products

If you’re looking for a loan or deposit product to meet your financial needs, use your knowledge of APR and APY to find the right one for you.

When considering options, we recommend comparing APR/APY rather than only looking at the listed interest rate. Using APY or APR (depending on the type of financial product you are looking at) will give you a better understanding of what you will actually pay or earn.

Taking control of your finances

Educating yourself on personal finance topics can help you make a plan for meeting your financial goals.

Are you looking for the right place to put your savings as you save for relocation for residency, a down payment for your first home, or a big family vacation? A high-yield savings account can help you earn money passively as you save.

Panacea Financial’s high-yield savings account has a competitive interest rate with no required minimum balance to receive our best rate! Open your account with as little as $25. See our current APY and open your account today!

Fine Print
APR and APY rates in this article are examples only, and do not represent offers from Panacea Financial. APR rate depends on credit score, loan term, and other factors. APY is subject to change without notice and may be withdrawn at any time.