💰Understanding APY vs. APR

While APR (Annual Percentage Rate) and APY (Annual Percentage Yield) sound similar, they are used for different types of products and measure different things.

What is APR?

APR represents the annual cost of borrowing money. It is commonly used for products such as:

Credit cards
Mortgages
Personal loans
Auto loans

APR shows the interest rate charged over a year but generally does not account for the effects of compounding. When you borrow money, APR helps you understand the cost of that borrowing.

What is APY?

APY represents the annual return earned on money that you deposit or invest. It is commonly used for products such as:

Savings accounts
High-yield savings accounts
Money market accounts
Certificates of Deposit (CDs)
Yield-generating investment products

Unlike APR, APY includes the effect of compounding, meaning it reflects not only the yield earned on your principal balance but also the yield earned on previously accrued returns.

Why We Use APY?

Our product is designed to help users earn yield on their assets. Because users are depositing assets and earning returns rather than borrowing money, APY is the most appropriate measure for communicating expected performance.

APY provides a more complete picture of potential annual returns because it accounts for the effects of compounding. This makes it the industry-standard metric used by banks, fintechs, and yield-generating investment products.

Important Note

APY reflects an annualized return based on current rates and assumptions about compounding. Actual returns may vary depending on market conditions, changes in underlying yields, and the timing of deposits and withdrawals.

In simple terms:

APR tells you what you pay to borrow money. APY tells you what you earn on money you deposit or invest.

Example:

Suppose a product advertises a 5.50% APY and compounds returns daily.

What annual rate is actually being earned before the effects of compounding?