APR vs APY
While you would certainly be forgiven for confusing APR and APY, they are different. APR has been outlined above, but APY (annual percentage yield) is a similar, albeit more complicated, topic. While APR factors simple interest into its equation, APY factors compound interest. Say you have a $500 loan that compounds monthly, with a 1% monthly interest rate. At the end of the month, the balance would be $505. While APR would only assess interest on top of $500, APY assesses interest on the entire $505, making APY the higher percentage rate.