In order to gain more passive income, investments can be made in various ways, such as savings or investment funds. Interest rates can be specified into two types; Annual Percent Rate (APR) and Annual Percent Yield (APY), which will be the topics we’re going to dive into today.
The two types of interest rates can provide different outcomes from various factors which have also been used in DeFi to invest with cryptocurrencies like liquidity pools and staking.
Annual Percent Rate (APR)
Annual Percent Rate is a type of interest rate providing a yearly reward by calculating a fixed amount of savings. For example, banks provide interest rates to people who are saving yearly.
Annual Percent Yield (APY)
Annual Percent Yield is another type of interest rate which provides reward monthly, quarterly, or half-year returns by calculating savings plus compound interest. In the short-term run, the difference is unnoticeable at first, but there can be a clear difference when the duration is longer.
APY will always be higher than APR as the rewards are paid more frequently and always included in the next payment time, such as investing in funds, stock markets, or DeFi, which can provide rewards faster when compared to APR.
APR vs. APY: What’s the difference?
The overall view of the two terms, APR and APY, are quite similar, however, the difference between the two is the compound interest rates and durations. If banks are providing a 6% rate of APR, investors will gain a fixed reward calculated by the amount of savings which is in the form of yearly payments.
On the other hand, compound interest plays the biggest role to allow APY to provide more income. For example, monthly or quarterly rewards will yield higher income as compound interest is implemented as part of the reward’s calculation as well.
In DeFi World, Interest rate is always shown as an APR due to regulations that protect users’ rights. Even if the reward can be paid weekly, monthly, and quarterly, facilitators can’t make a decision by themselves as the rewards can be paid in different variations of currencies, therefore, there may be a few that show interest rates in the form of APY.
For those who want to gain passive income, understanding the difference between APR and APY for better decision-making will be crucial.
As a matter of fact, every area of investment contains risks, therefore investors are required to conduct in-depth research in order to gain a better level of understanding of risk management.