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  • KNOWLEDGEBASE
    • APY vs APR
    • How is Net APY calculated?
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  • Why does it matter?
  • Why is it typically "Supply APY", but "Borrow APR"?

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  1. KNOWLEDGEBASE

APY vs APR

Annual Percentage Rate vs Annual Percentage Yield

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Last updated 3 years ago

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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 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 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 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.

In short: APY, or , takes into account , but APR, which stands for , does not.

source: investopedia.com

Why does it matter?

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.

You can change between APY and APR for Interest rate model in asset page by turning 'Compounding' indication On/Off.

Why is it typically "Supply APY", but "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.

cost of funds
compounding
compounding
annual percentage yield
compound interest
annual percentage rate
APY and APR difference at scale