APR (Annual Percentage Rate)
In simple terms
APR is the simple yearly rate. It does not assume you reinvest anything, which makes it a smaller number than APY for the same underlying rate, and usually a more honest one.
Definition
A yearly rate quoted without any compounding assumption.
In depth
APR annualises a periodic rate linearly: a periodic rate multiplied by the number of periods in a year, with no compounding term. For the same underlying rate, APR is always less than or equal to APY, and the gap widens with compounding frequency. In lending markets APR is generally the borrowing side's honest cost and the lending side's uncompounded return; the difference between the two, the spread, is where a protocol's reserve factor and any insurance fund are funded.
How does APR (Annual Percentage Rate) work?
A protocol computes the rate for the current period and multiplies it out to a year. Because no reinvestment is assumed, APR is what a position earns if payouts are taken and left uninvested. Comparing two products means comparing like with like: an APY on one and an APR on the other makes the first look better even when the underlying rates are identical.
An example
An illustrative 12 percent APR compounded monthly works out to roughly 12.7 percent APY. The same underlying rate compounded daily is roughly 12.75 percent. The bigger the advertised gap between two products, the more likely one is quoting APY and the other APR.
Figures are illustrative only.
What beginners get wrong
- Comparing an APY against an APR and concluding one product pays more.
- Assuming either figure is fixed. In DeFi both float continuously with supply and demand.
- Overlooking the borrow-side APR when a strategy involves leverage, since it accrues whether or not the position gains.
Related terms
Part of
What is DeFi, and how does decentralized finance work? — the subject page for defi, with all 18 of its definitions in one place.
Educational only — not financial advice.