APR, or annual percentage rate, calculates the percentage of the principal cost someone pays over one year, taking into account all charges, according to Investopedia. The APR uses only the simple interest rate. This is different from the APY, or annual percentage yield, which uses the compound interest.
The APR and APY are similar, but they have some differences that customers must understand when applying for a loan. Customers calculate the APR of a loan using the gross principal borrowed, interest rate, number of periods in one year and number of periods over the entire loan, explains Investopedia. To calculate the APY, customers use the compound interest, which is interest on the simple interest rate.