Loans and Savings

• Banks tend to use APR, which stands for annual percentage rate, as a basis for measuring the interest rate on loans. If you have a loan outstanding that uses such a measure, you should be aware that it is not APR that you are being charged, but the APY, or annual percentage yield. The APY takes into account the "interest of accrued interest". As the APR is lower than the APY, banks will often quote the APR as it appears cheaper. Opposite to loans, banks will instead use the APY, rather than the APR, when offering savings products. This is because the APY always appears higher.
  
  

APR and APY Calculations

• You may obtain the APY by first dividing the APR by 12. Then, raise that rate by the number of months accrued. Consider a loan with an APR of 10 percent with an outstanding loan of $10,000, and the loan has been outstanding for 12 months. You have not made any payments on the loan. The monthly interest is 0.833 percent, rounded down to the nearest thousandth. Adding one, raising to 12 and multiplying by the outstanding balance gives $1,438 of accrued interest, and not $1,000 as signified by the APR. To convert the APY to the APR, do the exact opposite.
  
  

Months and Days

• Interest from both the APR and APY may be calculated on either an annual, monthly or even a daily basis. Thus, when converting APR to APY or vice-versa, it is helpful to know how banks define months and days. With the exception of leap-years, a year is equal to 365 days. Thus, if interest is calculated daily, which is common with credit cards and lines of credit on checking accounts, you should divide the APR by 365 to obtain the daily rate. A month, according to banking policies, is equal to 30.416 days for all years except for leap years.
  
  

Certificate of Deposits

• Many people invest in Certificate of Deposits, or CDs, as a form of savings. You are unable to withdraw from CDs. In return, however, you will receive a high level of interest until the CD "matures". After maturity, you may withdraw the funds. To calculate the amount of money received from a CD after maturity, perform an APY calculation. Divide the interest rate by 100, add one, and raise this value to the number of years until maturity. Then, multiply this value by the total amount deposited into the account.