Understand Interest, APR, and APY
Understand how interest, APR, and APY affect the cost of borrowing and the growth of savings.
What Understand Interest, APR, and APY gets you.
By the end of this upgrade, you will be able to correctly interpret interest rate, APR, and APY figures on any loan or savings product you encounter.
- A current loan statement or offer showing an APR
- A current savings account statement showing an APY
- A calculator or spreadsheet for running rate comparisons
Run the upgrade.
- 01
Understand simple interest
Learn that simple interest is calculated only on the original principal, with no compounding.
Simple interest = principal x rate x time
- 02
Understand compound interest
Learn that compound interest is calculated on principal plus previously earned interest, so balances grow faster the more often it compounds.
- 03
Understand APR
Learn that APR (annual percentage rate) reflects the yearly cost of borrowing, including certain fees, making it useful for comparing loan offers.
- 04
Understand APY
Learn that APY (annual percentage yield) reflects the actual yearly return on savings including the effect of compounding, making it useful for comparing savings products.
- 05
Compare a loan APR against a savings APY
Look at a real loan APR and a real savings APY you hold and explain in your own words which one is higher and why that matters.
- You can define simple vs. compound interest
- You can explain what APR measures and where to find it
- You can explain what APY measures and where to find it
- You can compare two products using their APR or APY figures
Revisit when
- Comparing a new loan, credit card, or savings offer
- Rates on existing accounts change