When making financial decisions, I often encounter two terms: APR and APY.

Most people think they are the same, but in fact, there is a big difference between them, and this difference can significantly affect your wallet.

If someone asks what APR means, in short, it shows the simple annual interest rate.
The rates we see in credit card interest, consumer loans, or mortgage loans are usually APR.
However, this rate is calculated only on the principal, meaning it does not account for compound interest effects.
For example, if a credit card offers 15% APR, it is simply the interest calculated on the initial amount.

APY, on the other hand, is a completely different story.
It includes compound interest and shows the actual return.
Interest calculated daily, monthly, or quarterly is added to the principal, and then the new interest is calculated on this increased amount.
You will see APY in bank deposit accounts, investment funds, and crypto staking.
APY is always higher than APR because it accounts for the interest-on-interest effect.

Understanding the difference between the two is simple with a basic example.
Imagine a credit card with 15% APR and an investment account with 15% APY.
In the credit card, you only pay interest on the principal.
In the investment account, interest is calculated and added to the principal each month, so the next month, interest is calculated on this new amount.
By the end of the year, a noticeable difference emerges between the two.

It is also important how frequently the interest is compounded.
If it is compounded daily, it results in more gains or costs than if compounded monthly.
Instead of just looking at APR when making investment decisions, it is much smarter in the long run to consider APY by taking into account the effect of compound interest.
Especially in the crypto world, knowing this difference is vital when evaluating staking yields.