Choosing Loans Wisely – APR vs. APY

Choosing Loans Wisely APR vs APYAre you considering taking out a mortgage for a new home? How about for a new car, or home improvements?

Well there is a major battle of acronyms going on in our financial lives…that many are not aware of.

The difference between APR and APY.

APR stands for Annual Percentage Rate and APY stands for Annual Percentage Yield.

Both are used when you borrow money for things like an auto loan or credit card. Both use a percentage, but are calculated much differently.

Here’s the difference:

APR uses simple interest, and APY accounts for compound interest.

You must know the difference, because some financial institutions try to trick you with these numbers. And when you are shopping for loans, you must be in a position to make educated choices.

Here is an example:

If you take out a 30 year mortgage and the APR is 5%, your APY will be 5.12%.

This might not seem like much, but over time it will add up to thousands and thousands of extra dollars in interest.

My suggestion is to focus on APY and not APR, when borrowing money.

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