In this article, we’re exploring the differences between APY vs interest rates. These are important considerations whether you’re looking to access foreign high-yield accounts or deposit savings with a bank in your hometown.
This article is part of our free series on finding the best offshore bank account interest rates, which you can access using the link above.
Feel free to use the table of contents to jump ahead to the sections most relevant to you.
Table of Contents
APY vs Interest Rate
The main difference between APY (annual percentage yield) and interest rate is that APY takes into account compounding periods while interest rate only refers to the annual rate applied to a particular account.
As a result, APY calculation is an important step in fully understanding the potential returns on a deposit account, Certificate of Deposit, or other interest-bearing investment vehicle. In other words, the importance of APY is that it provides a clear picture of the total returns offered by a particular interest-bearing investment, including the effect of compounding.
Of course, while APY calculates the total return, the interest rate applied to an account is critical to understanding the total return. However, there are limitations to simply comparing interest rates and not looking at the compounding rate of an opportunity.
Note: APY vs APR (annual percentage rate) is another common question we receive. It’s important to note that APY refers to compounding interest you receive for holding funds with a bank or in an investment product while APY refers to the interest charged by a bank or financial institution for borrowing capital.
Do You Want Our Free Non-Resident Banking Guide?
Sign up here to receive our Free Non-Resident Banking Starter Guide and weekly updates on the best account opening options available:
Frequently Asked Questions
Below are a few of the most common questions we receive from people looking into APY vs interest rate. If you have further questions you would like to ask our team, don’t hesitate to get in touch.
Is APY Higher Than the Interest Rate?
Yes, APY is higher than the interest rate because it takes into consideration the positive effect of compounding. This is because interest rate only refers to the amount of interest earned in a year while APY calculates the interest in combination with the compounding periods during the year. As a result, if you are looking at a single account with multiple compounding periods in a year, the APY will be higher than the interest rate.
What Does 5% APY Mean?
5% APY means the total return that you will receive on a particular account is 5% in an annual period. This takes into consideration the interest rate applied to the account as well as the compounding periods when the interest will be applied.
What Does 40% APY Mean?
40% APY means the total return that you will receive on a particular account is 40% in an annual period. This takes into consideration the interest rate applied to the account as well as the compounding periods when the interest will be applied.
Why Is APR Higher Than APY?
APR is higher than APY because APR (annual percentage rate) refers to the cost of borrowing money from a bank or financial institution while APY (annual percentage yield) refers to the total return a bank is willing to pay you to leave money in an account.
Is APY Higher or Lower Than APR?
APY is lower than APR because banks aim to make a profit between the money they borrow and the money they lend to borrowers. This difference is called the interest rate spread and it’s one way that banks generate revenue.
Do You Want Help Opening Bank Accounts?
If so, you can access GlobalBanks Insider and start the process of applying for an offshore account in a few clicks.
GlobalBanks Insider is a dedicated account opening solution that involves direct support from our team and direct introductions to the banks of your choosing. It gives you instant access to the…
+ Direct support from a team of banking experts
+ Direct introductions to your desired banks
+ Answers to your most pressing questions and challenges
+ Expert insights on which banks to choose & why
+ Plus FULL access to our entire suite of account opening tools and intelligence!
And “yes!” GlobalBanks Insider is designed to help foreign and non-resident individuals and companies open bank accounts.
You can learn more on the products page from the main menu above.
