I’ve noticed that many people confuse APR and APY when looking for the best investment or loan terms. These are two completely different metrics, and the difference between them can cost you real money.

First, let’s clarify what APR is. It’s simply the annual interest rate, calculated only on the principal amount. No complicated calculations. If you take out a loan at 15% per year or use a credit card with that rate, the APR shows exactly that number. It’s used mainly for credit cards, consumer loans, and mortgages.

Now, APY is a completely different story. This is the annual percentage yield, which takes compound interest into account. When interest is compounded not just once a year, but several times (daily, monthly, quarterly), it’s added to the principal, and in the next period the interest is calculated on the increased amount. The result is a snowball effect.

To understand it practically: if a bank deposit pays 15% per year with daily interest compounding, then the APY will be significantly higher than 15%. For example, it could be 16% or even more, depending on how often the interest is compounded. That’s why APY is always higher than or equal to APR.

In the crypto world, this is especially important. When you stake tokens or put money into a deposit, platforms often display APY because the interest is credited frequently, sometimes even daily. If you look at the number alone without understanding the difference, you can make miscalculations.

Here’s a specific example: two credit cards with the same rate of 15%. On the first one, it’s simply APR, and on the second it’s listed as APY with monthly compounding. The second one will cost you more, because interest will be applied several times per year and each time added to the balance.

When choosing between investment offers or loans, always look at APY—especially when compound interest is involved. That will give you the real picture of how much you’ll earn or spend. In this case, APR can be misleading because it doesn’t show the full cost.

In short, remember this: APR is just a nominal rate, while APY is what you’ll actually receive or pay after accounting for all accruals. For long-term investments or loans, this difference becomes very significant.