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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%

However, let's now put these numbers in an Amortization Calculator: enter image description here

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?

  1. 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?
  2. How would things change if the loan lasted say, 5 years?

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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?

It's lower because the monthly payment decreases the amount of principal that is subject to interest each subsequent month, and you aren't accounting for payments with your 6% APR calculation. You can see on the schedule that the interest for each month is 0.5% (6%/12) of the remaining principal from the prior month. You could say their net yield was 3.28% of the loaned amount, but since the loaned amount decreased each month it might not be the clearest way to illustrate the difference between APY and APR.

A simpler APR and APY illustration would be a scenario in which the amount subject to interest for the period is comparable (either no payments/additions or equivalent payments/additions) and the difference is due only to compounding.

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  • so mortgage lenders never really make the advertised APY? Sep 25, 2023 at 12:02
  • @AntónioGonçalves Typically you see APY advertised for savings accounts, they show that because it's slightly higher and it is accurate for a situation where you dump some money into the account and leave the interest in. APY isn't really advertised to lenders except to the extent that you view savings accounts as lending.
    – Hart CO
    Sep 25, 2023 at 15:34

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