APR, or Annual Percentage Rate, is a fundamental financial term used to express the annual cost of borrowing or the annual return on an investment, without compounding. It's a standardized way to compare different financial products, making it easier to understand the true cost or potential return. This article explains APR, its calculation, its importance in lending and borrowing, and its relationship to APY, particularly within the crypto and DeFi landscape.
APR represents the yearly interest rate on a loan or investment, excluding the effects of compounding. It includes fees and other costs associated with the transaction, offering a more complete view of the total borrowing cost. This contrasts with APY (Annual Percentage Yield), which includes compounding.
APR is calculated using simple interest. Here's a simplified formula:
APR = (Periodic Interest Rate * Number of Periods in a Year)
For example, a loan with a 1% monthly interest rate has a 12% APR (1% * 12). However, for more complex financial products, the APR calculation can be more involved, factoring in the loan term, payment schedule, and any additional fees.
APR is widely used in loans and credit cards to show the annual borrowing cost. It includes not just the interest rate but also fees like origination fees or closing costs. This makes it a more accurate representation of the total borrowing cost than just the interest rate.
The main difference between APR and APY is compounding. APY considers compounding, while APR doesn't. Compounding means earning interest on earned interest. This makes APY a more accurate measure of the actual investment return. However, APR is better for comparing loan costs, as it reflects the total borrowing cost, including fees. APY is always higher than APR for the same interest rate and compounding period.
Feature | APR | APY |
---|---|---|
Compounding | Doesn't include compounding | Includes compounding |
Fees | Includes fees and additional costs | Doesn't include fees |
Use Case | Loans, credit cards, mortgages | Investments, savings accounts |
Learn more about APY.
Understanding APR is vital for sound financial decisions:
In the crypto space, APR is often used in DeFi lending and borrowing platforms. These platforms let you earn interest on your crypto or borrow against it. Understanding APR is key for evaluating these opportunities.
Learn more about crypto lending, decentralized finance (DeFi) and its use cases.
Stablecoins, cryptocurrencies pegged to stable assets like the US dollar, are often used in DeFi. Understanding APR and APY is crucial when lending or borrowing stablecoins, as it determines your returns or borrowing costs.
APR is a vital financial concept for understanding borrowing costs or nominal investment returns. By understanding APR's calculation, its link to APY, and its role in various financial situations, you can make smarter financial choices.
Related topics: dollar-cost averaging, and how to buy and sell crypto.
Discover the top platforms for buying, selling, and trading cryptocurrencies
Discover the top platforms for buying, selling, and trading cryptocurrencies
Whether you're just starting out or looking to level up, explore these trusted resources from Bitcoin.com:
APY stands for annual percentage yield. It is a way to calculate interest earned on an investment that includes the effects of compound interest.
Read this article →APY stands for annual percentage yield. It is a way to calculate interest earned on an investment that includes the effects of compound interest.
Lending is a foundational activity in any financial system. Learn more about it.
Read this article →Lending is a foundational activity in any financial system. Learn more about it.
DeFi lending protocols empower you to earn interest on your deposits and/or use them as collateral to borrow.
Read this article →DeFi lending protocols empower you to earn interest on your deposits and/or use them as collateral to borrow.
DeFi lending protocols empower you to borrow by using your cryptoassets as collateral.
Read this article →DeFi lending protocols empower you to borrow by using your cryptoassets as collateral.
Learn what makes decentralized finance (DeFi) apps work and how they compare to traditional financial products.
Read this article →Learn what makes decentralized finance (DeFi) apps work and how they compare to traditional financial products.
Decentralized Finance (DeFi) is bringing access to financial products to everyone. In this article we examine some prominent use cases.
Read this article →Decentralized Finance (DeFi) is bringing access to financial products to everyone. In this article we examine some prominent use cases.
Stay ahead in crypto with our weekly newsletter delivering the insights that matter most
Weekly crypto news, curated for you
Actionable insights and educational tips
Updates on products fueling economic freedom
No spam. Unsubscribe anytime.
Over wallets created so far
Everything you need to buy, sell, trade, and invest your Bitcoin and cryptocurrency securely
© 2025 Saint Bitts LLC Bitcoin.com. All rights reserved