So, from what I understand:
- APR: rate advertised to borrowers (without compounding)
- APY: rate advertised to lenders (with compounding)
So, for a loan with APR of 6%, that compounds monthly:
- APY = (1 + (0.06/12)) ** 12 - 1 = 6.18%
Now if I'm a Lender, my APY would be
total interest / loan amount, right?
Well, if I do:
- 3,279.72 / 100,000.00 = 3.28% (which is lower than 6.18%)
Why is this lower?
- Does the APY for amortization schedules work differently (because interest is front-loaded or whatever)? But since the loan only lasts one year, how would that even make a difference?
- How would things change if the loan lasted say, 5 years?