Plain-language definitions for the finance terms that come up most often across loans, mortgages, and investing. See the Finance guides for the full explanations behind these calculations.
| Term | Definition |
|---|---|
| Principal | The original amount borrowed or invested, before interest. |
| APR | Annual Percentage Rate: the yearly cost of borrowing, including interest and most fees, expressed as a percentage. |
| APY | Annual Percentage Yield: the real annual return on savings or investments, accounting for compounding. |
| Amortization | Paying off a loan through fixed, regular payments that cover both interest and principal over time. |
| Compounding | Earning or owing interest on both the original amount and previously accumulated interest. |
| Equity | The portion of an asset’s value you actually own, after subtracting any remaining loan balance. |
| Liquidity | How quickly an asset can be converted to cash without losing significant value. |
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Finance
No. The interest rate is just the cost of borrowing the principal. APR includes the interest rate plus most lender fees, so it’s a more complete picture of a loan’s cost.
APR matters when you’re borrowing money. APY matters when you’re saving or investing money, since it reflects what you actually earn.
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