In the world of cryptocurrency and finance, when I’m researching ways to make money, I come across the terms APR and APY very often. To be honest, I was confused at first, but once I understood the difference, everything became much clearer.

Let’s start with the simpler one: APR. Annual Percentage Rate—that is, the annual percentage rate—basically shows how much interest you will have to pay or earn over a specific period. But the important point here is this: APR is calculated only on the principal amount and ignores the impact of compound interest. Credit card interest, consumer loans, and mortgage loans usually use APR. So if someone tells you “15% APR,” that’s just a simple rate calculated based on your starting amount.

But when it comes to what APY is, things get a bit more interesting. APY, or Annual Percentage Yield, reflects your actual earnings more accurately because it includes compound interest. The interest on your investment is calculated not only on the principal but also on the interest you earned in previous periods. That means the same percentage rate will always result in a higher APY than APR.

In bank deposit accounts, investment funds, and crypto staking, you’ll see APY. For example, if a crypto platform offers you 15% APY, that rate includes compound interest, and by the end of the year, you’ll earn much more than you would with the same 15% APR.

The difference between them essentially depends on how frequently the interest is compounded. If interest is calculated daily, the APY rate can differ significantly from the APR. Seeing 15% APR on a credit card is something to worry about, but seeing 15% APY on an investment account means your actual earnings will be higher.

When making financial decisions, I always look at APY because it gives me a more realistic picture. Especially for long-term investments, the power of compound interest is huge. Making decisions based only on APR means overlooking your money’s true potential. When doing crypto staking or choosing an investment product, it’s very important to understand what APY is and how it’s calculated.