Annual Percentage Ratio (APR) and Annual Percentage Yield (APY) are often confused to mean the same thing. While the economics behind these concepts are related, they are not the same. The annual percentage yield (APR) is used to calculate interest in a deposit account. It is the interest given to a lender accrued over a year. It works on the principles of compound interests.
Banks in traditional finance and DeFi lending protocols need money or crypto from users to lend to borrowers. The amount given to the lenders over the year with compound interest calculated is the annual percentage yield (APY). The annual percentage rate, on the other hand, applies to the borrower. It is the amount to be paid by the borrower for the loan.
The APR doesn’t include compound interest. The annual percentage rate is simply the cost of borrowing money with all applicable fees. The key difference is that APY applies to the lender while APR applies to the borrower.