Auto Loan APR vs. APY What You Need to Know

When you’re looking for a car you probably will be financing, especially if you’re buying one that’s new or nearly new. Make sure you pay close attention to how much interest you’ll be paying, because the APR that is listed and the APY are not the same thing. The APR is the Annual Percentage Rate. It measures how much, on a yearly basis, you’ll be paying in interest.

1147141 motor sports 2 Auto Loan APR vs. APY What You Need to KnowIt also doesn’t take compound interest into account. The APY, on the other hand, is the Annual Percentage Yield, and it does account for compound interest. It’s actually a much better measure of how much interest you’ll be paying, but most banks and lending institutions list their interest rates in APR (which is perfectly legal) because it helps hide some of the actual costs that you’ll be required to pay. It makes things look like a better deal than they actually are, so asking about the APY is never a bad idea when trying to get a complete understanding of how much you’ll be paying.

When banks offer investment options, though, they usually list them by APY because it then looks like you’re getting paid more of a return, when in fact you’re actually not. You can calculate the APY off of the APR and vice versa, and they are different enough that it’s important to understand them. On a $1000 balance with 13% interest, for example, you would pay about eight dollars more in interest over the course of a year. While it sounds like nothing, it all adds up, especially if you owe thousands of dollars.

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