APY vs APR
Annual Percentage Rate vs Annual Percentage Yield
Last updated
Was this helpful?
Annual Percentage Rate vs Annual Percentage Yield
Last updated
Was this helpful?
Annual percentage rate (APR) refers to the yearly interest generated by a sum that's charged to borrowers or paid to investors. APR is expressed as a percentage that represents the actual yearly cost of funds over the term of a loan or income earned on an investment. This includes any fees or additional costs associated with the transaction, but it does not take compounding into account. The APR provides consumers with a bottom-line number they can compare among lenders, credit cards, or investment products.
The annual percentage yield (APY) is the real rate of return earned on an investment, taking into account the effect of compounding interest. Unlike simple interest, compounding interest is calculated periodically and the amount is immediately added to the balance. With each period going forward, the account balance gets a little bigger, so the interest paid on the balance gets bigger as well.
source: investopedia.com
When utilisation and therefore rates are low, the difference is negligible. When it's high, compounding matters in the long run. The graphical representation of the difference can be seen in the chart below.
As you can see, when utilisation is extremely high, Deposit APY can be greater than Borrow APR.
Suppliers tend to provide liquidity for a long time, likely experiencing the effect of compounding, while Borrowers(especially in variable-rate-based lending protocols) are typically short-term actors, so debt compounding over a few days doesn't really happen.
