APR, APY, and Interest are all part of the banking or finance industry and affect consumers, sometimes, without their knowledge. Consumers should have a clear understanding of these terms to know how their credit is effected and how much money they are actually paying their creditor on borrowed funds. Complex financial jargon is typically lost on the average consumer, but it is important to understand industry terms for the benefit of the consumer. This understanding will assist them in making positive financial and credit decisions in the future. For example, at some point, one is bound to buy a car, have a mortgage, or want some form of credit. If that person enters into such an agreement, unaware of what these terms are, they may find that they are paying much more than they ever expected. As the old saying goes, knowledge is power and that works for finance as well. The following information is a simple overview of meaning and impact of APR, APY, and interest on the average consumer.

Interest - What is it and does it matter?

When borrowing money by taking out a loan, or through the use of a credit card, the amount of money owed over time will increase due to interest. Interest is essentially how much we are being charged for the use of the money we are borrowing. The lender sets an interest rate, some percentage of the original amount, that the borrower agrees to pay for use of the service, in addition to the original amount lent. Interest can also be a percentage of money we receive. We receive such funds when we deposit money into savings, shares, or other financial asset programs which over time will accrue a set percentage of interest. When we put money away into a savings account for instance, the financial institution that holds our funds is able to use the money for investments and then pays the depositor for the use of such funds.

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APR - What is it and how does it work?

Annual percentage rate (APR) is an important factor to consider when looking into getting a credit card or any other kind of financing. The APR can affect how much money remains in or is removed from your pocket. It is the amount you will have to pay in interest each year. Credit does not come free, people are charged for its use and if you do not pay on time, or are unable to pay off your balance each month, the charges can compound quickly and can result in you owing much more than initially borrowed. This means the interest you accumulate is also charged in addition to the amount of money you actually used. Rates can vary widely, which is why paying attention and choosing the lowest APR is essential to making smart financial decisions.

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APY - What is it?

As a financial tool, the APY is used to ascertain how much a deposit earns. It is the standard way a consumer can compare investments. APY is the amount your deposit will earn over a year. It is income earned, therefore you would want your financial institution to have a high APY. It is unique because it makes it possible to receiving earnings on your earnings, which is called compounding. Your APY is the actual amount you make in interest on your money.

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