Tonight it occurred to me: how many of you really know the difference between APR and APY? I myself was confused about these two terms for quite a while before understanding how they actually work. Let’s find out together.

Let’s start with APR, the annual percentage rate. It’s the simplest concept of the two. Essentially, APR tells you how much interest you will pay or earn in a year, calculated only on the initial principal. Nothing complicated: it’s simple, straightforward interest. You often see it with credit cards, consumer loans, and mortgages. If you borrow 1000 euros with an APR of 5%, you will pay 50 euros in annual interest on the principal.

The problem, however, is that APR doesn’t capture the full picture. It doesn’t account for how often interest is compounded during the year. If interest is compounded monthly, weekly, or even daily, your actual return will be different. That’s why APY was created.

APY, the annual percentage yield, is the smarter cousin of APR. It includes the effect of compound interest, meaning when interest is added to the principal and then earns interest itself. Imagine that the interest you earn each month is added to the principal, and the next month you earn interest on that amount as well. It’s like a snowball rolling and getting bigger and bigger. APY reflects the true return you will get over time.

Where will you find APY? On bank savings accounts, mutual funds, and especially in cryptocurrency staking on platforms like Gate. This is where APY becomes really interesting because compounding can make a significant difference in your portfolio.

In practice, APY will almost always be higher than APR, precisely because of this compounding effect. If an investment offers you a 10% APR but interest is compounded daily, the actual APY will be slightly higher. It’s not a huge difference in any case, but over the long term, it matters.

This is why, when evaluating an investment or a loan, you should always check which number they are showing you. If you see APR, you know it’s the basic number without compounding effects. If you see APY, you’re looking at the actual return you will receive. In the world of cryptocurrencies and staking, APY is the number you should follow to truly understand how much your capital will grow.