There’s an important distinction that I want to make clear for people when it comes to the interest rates that are quoted, be it on loans (interest you pay) or on an investment (interest paid to you). When you’re looking into a financial product, realize that what you’re being quoted is best suited to the providers purposes.

If you’re looking for a loan or comparing interest rates on credit cards, you’ll typically see the Annual Percentage Rate (APR). Even though it says it’s annual, it doesn’t take into consideration any effects of compounding. Therefore, you should realize that the actual effective interest rate could be higher than what you’ll see advertised.

When you’re comparing savings accounts, money market accounts, or any other interest bearing account you’ll typically be quoted the Annual Percentage Yield (APY). This figure does take into account the effects of compounding so it could be an inflated figure.

You can see how these two different figures suit the purposes of either the lenders or the account providers. It’s not necessarily going to make a huge difference, but it’s an important distinction to understand regardless.

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