Decoding Financial Terms

APR, APY and more

Reading the fine print of a credit card or student loan application can be daunting; just what do all those acronyms mean? Fortunately, we’ve broken down a list of some of the most common financial terms you’ll encounter in your day-to-day life.

  • APR: The annual interest rate paid on an investment. APR doesn’t factor in the effects of compounding interest, only the monthly interest rate multiplied by twelve, which could result in a lower-than-actual interest rate.
  • APY: The annual interest rate paid on an investment, with the effects of compounding interest factored in. This is the “true” rate of yearly interest.
  • Compounding interest: While we’re on the subject, compound interest is the effect of any interest in an account earning more interest on itself. For example, if you earn $10 on an investment each month, that amount will increase the amount of the initial investment, in turn increasing your earnings.
  • ARM: Adjustable-rate mortgage. A long-term loan where the interest rate fluctuates during the term according to the market.
  • Amortization: Making regular payments over a period of time to pay off debt. With large purchases, like your car or home, an amortization schedule shows where you are in the process.

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