The annual percentage yield or APY is a term used for the computed annual rate that a financial institution pays clients for their money placed in the company’s investment and deposit products.

It is a tool that can be used by depositors to determine how much their deposits can earn for them. If you have some money set aside in certificates of deposit in a bank, you look into its APY in order to know how much it earns annually.

Difference with Annual Percentage Rate

Annual percentage yield is different from annual percentage rate although sometimes some people may confuse one from the other.

The former refers to the rate that a financial institution pays to a depositor or a lender while the latter refers to the rate being paid by the borrower to a financial institution.

Annual percentage yield usually is connected to deposits and other investment products while annual percentage rate usually are associated with loans and credit.

APY Benefit

One of the unique features of the annual percentage yield is that it takes compounding into account when being calculated. Compounding is a term used wherein earnings on a certain investment also consequently earn as part of the principal if left untouched for a certain period.

This simply means that as a certain investment product or deposit is earning a certain amount, that gets included in the calculation for the next period, thereby earning more as previous earnings are also being accounted. That is the secret of compounding and the annual percentage yield can let you see how much you can really earn on your money.

Getting The Best APY

In order to get the best advantage out of the best annual percentage yield, you might need to speak or inquire from the financial institution that you are eyeing.

One of the important questions that you can ask them is how often they calculate for compounding on their financial products.

Some may account for compounding on a daily basis while others do it quarterly. The more frequent the compounding, the better the APY earns for your money.

Consider also putting your money on products that usually pay out interest more often such as monthly as opposed to upon a certain financial product’s maturity. This will enable you to reinvest the interest earnings and then get the better APY for your deposits or investments.