Interest, APR, and APY

Definitions and Resources

Interest

The interest rate is the amount a lender charges a borrower and is a percentage of the principal—the amount loaned.

The interest rate on a loan is typically noted on an annual basis known as the annual percentage rate (APR).

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Annual Percentage Rate (APR)

Annual percentage rate (APR) refers to the yearly interest generated by a sum that's charged to borrowers or paid to investors.

APR is expressed as a percentage that represents the actual yearly cost of funds over the term of a loan or income earned on an investment.

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Annual Percentage Yield (APY)

The annual percentage yield (APY) is the real rate of return earned on an investment, taking into account the effect of compounding interest.

Unlike simple interest, compounding interest is calculated periodically and the amount is immediately added to the balance.

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Equifax video on APY and APR

How does IM handle interest?

IM makes interest straightforward for lenders and borrowers.

Every loan has a flat 10% APY for the lender.

Every borrower has a 15% APR applied to their loan.

The lender makes a 10% return on their lended/invested funds.

The borrower pays their loan and processing fees + maintenance.

The borrower can select up to a 12 month term on their loan.

Borrowers have more flexibility than lenders, and their is always the risk of a borrower defaulting.

In order to compensate for the flexibility and risk, the borrower is responsible for additional fees.

For Example:

A borrower is borrowing $100 at 15% APY.

$115 is the total loan amount due.

$110 goes to the lender.

$3 goes to processing the transaction.

$2 goes to the IM app.