NerdWallet's Smart Money Podcast - Pet Insurance vs Savings Account and the APR vs APY Rules That Could Save You Cash

Episode Date: April 27, 2026

Learn when pet insurance is worth the cost and how APR and APY affect your loans and savings accounts. Is pet insurance worth the monthly premium, or is a high-yield savings account the smarter play? Host Elizabeth Ayoola moderates an in-studio debate on whether pet insurance is a sound financial product or mostly an emotional purchase. Smart Money host Sean Pyles, CFP®, and NerdWallet social media content creator Taylor Mitchell weigh in on reimbursement models, breed-specific exclusions, pre-existing conditions, and how to think through a vet bill that could outpace your emergency fund. Then, Sean and Elizabeth break down annual percentage rate and annual percentage yield, covering fixed versus variable rates, how compound interest builds over time, why the Schumer box matters when you shop for a credit card, and what a 1% swing on a mortgage APR can mean over 30 years. Free resources from NerdWallet: Credit Card Interest Calculator https://www.nerdwallet.com/credit-cards/learn/credit-card-interest-calculator  Compound Interest Calculator https://www.nerdwallet.com/banking/calculators/compound-interest-calculator  Mortgage Calculator with PMI and Taxes https://www.nerdwallet.com/mortgages/calculators/mortgage-calculator  What Is APY? Annual Percentage Yield Definition and How It's Calculated https://www.nerdwallet.com/banking/learn/what-is-apy  Want us to review your budget? Fill out this form — completely anonymously if you want — and we might feature your budget in a future segment! https://docs.google.com/forms/d/e/1FAIpQLScK53yAufsc4v5UpghhVfxtk2MoyooHzlSIRBnRxUPl3hKBig/viewform?usp=header To send the Nerds your money questions, call or text the Nerd hotline at 901-730-6373 or email [e-mail]. Like what you hear? Please leave us a review and tell a friend. Learn more about your ad choices. Visit megaphone.fm/adchoices

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2027 volt and 2026 Equinox EV models. Visit your local Chevrolet dealer today for more details. So Elizabeth, say your pet gets sick. How much would you spend to get it back healthy? Honestly, I don't want to spend nothing. But because I love my pet, I would probably comfortably spend between $300 and $400. Okay, that's pretty good considering that you have fish. So if you're spending that much on fish, something must be seriously wrong. I have a dog, a cat, a cat, and a gecko, and lots of plants and maybe some tadpoles in my pond. And if I'm getting all of them healthy, that's going to be thousands of dollars

that I don't want to pay, at least not out of pocket. You're convincing me not to get that many pets, but I'm with you. I do not get a menagerie. Let me tell you it's expensive. But here's the thing. There are ways to cover pet health care expenses without paying out of pocket, and today we're going to talk about them. Welcome to NerdWallet's Smart Money Podcast,

where you send us your money questions, and we answer them with the help of our genius nerds. I'm Sean Piles. And I'm Elizabeth Ayola. Now this episode, we are going to be talking about some finance fundamentals. What is the difference between an APR and an APY anyway? But before we get into that, today we have our very own nerdy debate. And it's featuring Sean Piles and our fabulous social media content creator Taylor Mitchell.

And today's episode is special because we are shooting live from our studio in Scottsdale, Arizona. Welcome to Smart Money, Taylor. Thanks for having me. Hey, Taylor. I wanted to bring you on because we've talked about pet insurance before. You are anti-pet insurance. I am. I am very pro pet insurance.

And there are valid issues on both sides that we can get into. But we're going to have Elizabeth facilitate this nerdy debate. It's going to be a little formal here. So we'll try not to make it personal. It'll be professional, educational, and hopefully fun too at the same time. Of course. Ready? Ready.

Before that is the TMI queen. I have to let you guys know that back in my days, back in college, I used to be on something called debate mate, okay? So I have facilitated many a debate, okay? All right, just had to put that out there. So this is not going to go off the rails, is what you said. Well, I like a little drama, so I might go off the rails a little bit, but I'll be here to moderate, okay? Okay.

All right. Okay, first things first, we need our opening statements, all right? Keep it short and sweet. And then we are going to do rebuttal one, rebuttal two. Elizabeth's going to cross-examine you both, and then we're going to do closing statements, okay? I don't have any real, well, fish is a real pet, but I don't have any exercise. expensive pets. So I'm going to see which one of you is going to sway me on. If I do get the dog for aisle, whether I should get pet insurance or not, okay? I can kick things off here. I care about pet insurance

because of one of my friends who had a pet that got really sick. She was moving into her house. She had her two-year-old running around. Her husband was sorting dishes, doing all the busy stuff when you're moving into a home, and her dog was playing in their new, beautiful backyard, and she was taking it all in, enjoying the moment. She looks up and just sees that her dog has collapsed in the backyard. It'd been running around, having a great time, and is no longer moving. She goes out, there and the dog is just panting, trying to crawl along on his front two feet and isn't doing anything. It can't walk. Turns out it had slipped a disc just enjoying itself in the backyard. They rushed to the vet in the middle of moving everything in with their two young kids,

and they had to pay over $10,000 to get their pet back in working order, and a few surgeries later, of course. And she didn't have pet insurance up until that point. She was very anti-pet insurance. And she said, if I'd had pet insurance, I would have saved myself thousands of because pet insurance will typically cover 70 to 90% of what you have in your expenses. And she also just would have had a lot of peace in mind and less stress in that moment. And as someone who has many pets, as we've established, I don't want to go through that experience of feeling stressed and strained when life is already difficult enough. And so pet insurance gives me that peace of mind to know that I'm covered if and when something

inevitable happens to my pets. Thank you. Very moving story, Sean. Thank you. Taylor, I don't like pet insurance for context. I have a dog. In the past, I've had multiple dogs, multiple cats. I think pet insurance is more of an emotional decision than it is a financial decision. If you look at insurance as a whole in any industry, it is a for-profit business, which means statistically you will pay more in premiums than you get back in coverage. So I also think there's a bit of an empathy gap. If you look at most policies, they don't cover breed-specific issues.

So if a breed is known for bloat or hip dysplasia or heart problems, there's probably an exception in their policy. that they'll cover other things, but not what your dog is statistically most likely to fall under. They are also often a reimbursement model, which means at the vet, you are paying out of pocket and then sending the bill to insurance and hoping that it's coverage, which can be a bit confusing. I've had emergency surgeries for dogs before. I was not juggling with pet insurance, but if I was, you're like, okay, am I moving forward with this because I hope it's covered? Do I know it's covered? Could I do it if it wasn't covered? So those kind of issues.

I think the best thing to do for most people with pet insurance instead is to do a dedicated savings account and a high-yield savings account. So put your $150, $200, whatever that equal premium would be for insurance, instead put it in a savings account. And over time, you could build those funds to help. But I think statistically, like most people are going to be better off with owning and controlling a savings account. Thank you for that, Taylor. Okay. So we've had our opening statements, both very compassionate. Telling, it's time for rebuttals.

All right. So, Sean, what is your first rebuttal for Taylor's opening statement? All right. So for my rebuttals, I want to talk about some of the risks that pets face and that pet owner's face having pets. So first of all, one in four dogs will get cancer in their lifetime. 50% of dogs over age 10 will get cancer in their lifetime. I have a dog that is eight and a half, somehow, my sweet angel pepper, who's often in the background of these podcast episodes. And the expense of pet chemotherapy for dogs in Oregon where I live is about $5,000.

So say a couple years down the line, my dog gets sick, I have to pay for chemotherapy. $5,000 is about five years worth of premiums for me, and I would love to not have to pay for that out of pocket. And additionally, it's often smart to get pet insurance earlier on before your dog or your cat develops a pre-existing condition, because Taylor, you're right, there are a lot of limitations to pet insurance. One of them being that if you have a pre-existing condition in your pet, that's likely not going to be. covered. Like both of my pets have just garbage teeth. That's not going to be covered for a couple years until their teeth are in better shape. Having a single emergency that requires x-rays or a surgery can just make years of premiums worth it, like in the chemotherapy example. So I find it worth it. And just for the risk mitigation and the peace of mind, insurance can be an emotional decision,

but it can also be one that helps you come out ahead and just feels reassured when the worst does happen. And for a lot of people, pet insurance isn't horribly expensive. Like for a six year old medium-sized mixed breed dog, you might pay around $48 a month, which is pretty tolerable, at least in my budget, but you need to understand at the bottom line whether you could pay out of pocket once something does happen or if you might be better off having an insurance cover you in that situation. Thank you so much for that, Sean. I'm making notes. I'm making notes for my cross-examination. All right, Taylor, it's time for your rebuttals. I think one thing to consider with pet insurance is a very individual decision, but is more of the moral choice of at

what point is it not appropriate to keep care for a dog? A lot of people, when it comes to chemotherapy or cancer treatments, it is a decision of, is it worth it? Is it fair? Is it safe to do these medical interventions or not? And I know a lot of people, myself included, our pets are our family. So you don't want to be like up against a wall to make those decisions. For context, last summer, actually, I had a dog that fell ill to central nervous system valley fever. He's so sick. So sick. so fast, and it did turn into kind of a rabbit hole. Every intervention that we did caused a problem. So it was like a molehole, right? Every medication caused a kidney problem. We'd fix the kidneys, and then we'd have to, you know, it was just chasing our tail trying to put out fires.

And it was very hard and sad to be up against finances in that decision. I will say, you know, the doctor is like, well, we could do an MRI, but that's $7,000. And you're like, okay, but if we do the MRI and all of those where you just don't know. Right. So I think at the end of the day, again, it's a lot of an emotional decision. I do think there are budgets and circumstances where it absolutely makes sense. But I think a lot of people need to first look if they are trying to avoid or ignore the fact that they don't have an appropriate emergency fund, fix those tanks first, and then see if you can afford something like an insurance policy. I have so much I want to say, but Elizabeth is facilitating here. I'm not going to make sure. I am. Okay. It's time for some

cross-examination here. You've both made very strong arguments. So we're going to start with you, Sean. So you say that pet insurance is not that expensive relatively depending on what your budget is and it could cost anywhere from around 40 bucks or more a month. What happens if someone cannot afford to add that extra expense in their budget, especially considering today's economy? They would need to think about how they would cover some other kind of pet expense without that either liquidity or or the pet insurance. And so that might be turning to a debt product. There are care credit credit cards for your pets, which is not ideal. They often have zero APR periods, but if you don't pay it off within that period, you may have retroactive interest. So it can be a little

risky with care credit specifically, but just think through what you would do in that situation. And you're going to be in that tougher spot of having to grapple with your finances like you were talking about Taylor while you're navigating how you can have your pet be healthy again. So you just need to do that work ahead of time emotionally and financially because oftentimes you're going to be faced with that and you don't want to just be going on impulse. You want to know what you're getting into. All right. And then what about on the contrary side?

What about people who maybe have a very robust emergency savings or in your case a sinking fund for their pets already? Let's say it's got, I don't know, 20K inside of it, 30K. Do they still need pet insurance? What's the argument for them to get it? I would say yes because they're getting that money reimbursed. Do you want to be out all $20,000 if your pet has a bunch of health care expenses within one year? Or would you rather get 70 to 90% of that money back? Well, I thought that was the point of a sinking fund to sink it.

No? You're sinking it. You're spending that money. But my point is with insurance, you're still getting that money back. So say you have MRI as in surgery for a pet that does cost the total amount that's in your sinking fund. If you don't have pet insurance, that money is all gone. With pet insurance, you're getting some of that back, most likely reimbursed. All right.

That's a good argument. Taylor, it's time for your cross-examination. Okay. So you argue that some people could just have a savings and you can take those premiums that you're paying every month and put it into a high-old savings account. Good hack there. Gets all that compounding interest. But what about if you take your pet to the vet and they, heavens forbid, have cancer and the cost of the treatment exceeds what you have in your high-old savings account? what are the financial risks of that? And in that case, isn't it better to have pet insurance? That's so fair. I think it goes back to insurance being a for-profit business, which means the people who are reimbursed more than they pay are the exception. Everyone knows that insurance is a very profitable business. So yes, absolutely, if you go to the vet and there's an expensive bill, that is devastating emotionally. And like I experienced last summer, to have finances in that argument as well is a bit of a bit of.

a gut punch. But I do think that, as Sean was saying, there are debt products that are available. You know, something that I've used before is opening a credit card and getting the sign-on bonus with an expensive purchase, have to pay it off within the intro period. But I think if you are financially savvy, there are options that, again, not playing into like the for-profit business of insurance. I think statistically, and again, there's always going to be the exception, but I think statistically, if you are financially savvy enough, you can afford to forego pet insurance. That's a really good point, Taylor. And it takes me back to what you asked in the beginning, Sean, how much am I willing to pay

if my pet is sick, right? And I know I said $300 to $400, $400, I don't have a dog, a precious dog or a cat or a gecko. If I did have one and that was part of my family, as you kind of mentioned, Taylor, I would be willing to spend a lot more. But that is really a hard decision to make, right? Do you spend maybe $10,000 or $20,000 keeping your pet alive or helping them to recover or do you put them down, you know? It's a mathematical question too, because at a certain point, you can't be putting yourself in financial risk because of your pet.

And that's the situation people may end up facing if they don't have pet insurance or they don't have a sinking fund. But there's a number of value that you just can't surpass. And at which point you have to say, I'm sorry, I need to let the pet go. That's a very difficult decision. and I'm hoping to avoid that if I can, and that's why I have pet insurance. Thank you for bringing us back to the main point. I have one more cross-examination question for you, Taylor, and we all know that insurance, whether it's pet insurance, health insurance for humans,

can be very confusing. And you made a good point in one of your earlier arguments that sometimes the insurance doesn't cover, you know, all the things that you need for your particular breed. So my question is, what role does research play into this, right? because I think as a Brit who has moved to America and had to learn the health care system, I've had to, you know, research what my coverage is and what I'm eligible for and so on and so forth. So what role does that play for people who own pets in knowing before they pay for the pet insurance what's covered and what's not versus saying I'm just not going to get it because it may not be covered? Yeah, I think the research goes back even farther, which is before you get the pet.

A lot of people, whether they go to the Humane Society or they get from a breeder or whatever it is, It can be a bit of an impulse decision for a lot of people. I've been there myself. But I think, you know, it all goes back to can you even afford the insurance premiums? Can you afford the deductibles? Can you afford the pet plus your savings account? It really comes down to the research of, you know, for a period of time I had a great Dane in my family.

Very expensive dog. It's a Lamborghini of the dog. If something goes wrong and they're known for bloat. So they're known for these issues that are not covered in insurance. So yes, when it comes to looking at your policy, definitely look if they cover pre-existing conditions, if there's a puppy policy. Like they have all these different sub-polices. But I think it is possible to find a policy that helps cover for your dog.

But you're going to pay a premium for that. If you have anything that existed beforehand, if it's a Lamborghini of a dog, like anything like that, you will pay for those. Because, again, it's a for-profit business. I know I'm a little pessimistic repeating that. But that's really what it comes down to for me outside of the emotional cost is that statistically, I'm not going to come out on the right side of owning my insurance policy. I understand that. And that's why I have the Honda Civic of dogs. So can we do closing statements?

Yes, it's time for closing statements. Okay, convince me. Am I getting pet insurance or not? All right. The bottom line for insurance for me is risk aversion. I'm not trying to come out ahead because that's not the point of insurance for me. If you think about your car insurance or your homeowners insurance. It's not about making it as valuable as possible or getting all of your money out of it. In fact, you kind of don't want to use your insurance when it comes to your house, your car, because it's going to get more expensive. And for pet insurance, it's just about having that protection when I need it and not thinking that I'm trying to gain the system. Because if something does happen, your pet does need a lot of care. You probably will come out ahead. I honestly kind of hope that I

don't end up using my insurance because that means something bad has happened to my pets. But again, I'll have that peace of mind. I'll know I'm protected if and when something happens. And I know that my money is being directed into a smart product that will help me when I need it. Thank you, Sean. Taylor, closing arguments. I think pet insurance ultimately is more of an emotional product than it is financial, which has its benefits. But I think for most people going back before we get the pet, can we afford its basic care? Can we afford savings over time for the predictable things? And then over time emotionally, where is your line for the catastrophic that happens? Again, And it circles back to a bit of a moral and ethical decision for this being that can't speak.

Is it appropriate to continue care? At what point do you decide that? And again, they're family to me, so I don't want it to sound otherwise. But there is kind of that tipping point at what point it makes sense. I think most people who are financially savvy focus on the savings account, focus on putting it in a high yield savings and just, you know, continue living with your pet and hope for the best and all the preventative cares and the things that. wouldn't have been covered in insurance anyways. Get those, make sure the pets in good health, and go from there. Thank you both so much.

Would you like to know my verdict? Yes. I'm not getting any pets. Sorry, I.O. Sorry, no dog for you, Iyo for now. But if I were to get a pet, seriously, I'm not going to lie. Taylor's argument is swaying me. I don't want to give these companies any more money.

But for peace of mind, and because I didn't realize it was, you know, compared to my budget, relatively affordable. 50 bucks is really not that bad. I'd probably spend that on, I don't know, food or something. Zara. Right. Zara, exactly. So I would get the pet insurance just to have peace of mind because I really hate surprise bills. You're not just saying that to flatter me. No, no, no, no, no. To keep the peace between the co-os? No, no, no. I love being your opponent from time to time. So, no, yeah, so that's what I would do. But both very, very strong arguments. And I never thought about that that, yeah, I could essentially just create, you know, a savings account, right, for pet expenses versus doing the insurance, right?

You raise some really good points to, Taylor, because it's not the first thing I would say people should get in their financial life when they're sorting things out. You mentioned emergency funds. Definitely have that before you're going into something that is a really nice to have product like pet insurance. But for me, I feel, and I am privileged enough to have my bases covered and getting pet insurance is something I got two or three years ago. So six years into having my dog, like nine years into having my cat, something like that. So it wasn't my first thing that I was checking off my list. but I finally got to a place where I said, okay, I can cover this. My pets are at that tipping point of being around like middle age where it's going to get more

expensive and they didn't have any preexisting conditions at that point, again, besides their garbage teeth. So I wanted to get it while I could still get an affordable rate that would cover most things. So it's such a personal decision. It's also a timing factor and just a matter of being in a good place overall with your finances before you're going to get something like this. Yeah. I think that's my biggest takeaway.

If I do change my mind, I will definitely budget and plan and see what. those future expenses may look like and just have a pot of money ready before I get the pets. So thank you, Taylor. Well, Taylor, thank you for coming on. I am still very pro pet insurance. I'm sure you're still anti-pet insurance, but I'm glad that we hash this out for everyone listening. Yeah, I appreciate it.

Gave me some good things to think about. In a moment, we're going to remind you of some key fundamentals about personal finance. But before that, remember, listener, we want your money questions. Maybe you or your son is begging you for a dog like mine is and you want to know how to budget for it or you're just looking for ways to improve your budget so that you can improve your cash flow. Whatever your money question is, please send them to us. Where is it again? You can email us at podcast atnerbaw.com or text us or leave us a voicemail on the nerd hotline. The number is 901-730-6373. That's 901-730 nerd. You can also leave us a comment on Spotify or YouTube.

We'll be back in a moment. Stay with us. Amazon Presents Jeff versus Taco Truck Salsa. Whether it's Verde, Roja, or the orange one. For Jeff, trying any salsa is like playing Russian roulette with a flamethrower. Luckily, Jeff saved with Amazon and stocked up on antacids, ginger tea, and milk. Habaniero? More like habanier, yes. Save the everyday with Amazon. It's never too early to plan your summer story in Europe with WestJet from rolling

countryside to cobblestone streets. Begin your next chapter. Book your seat at westjet.com or call your travel agent. WestJet, where your story takes off. We're back and answering your money questions to help you make smarter financial decisions. Now, speaking of money questions, one of my favorite holidays is coming up. Sean, let's see how well you know me. Can you guess the holiday?

Is it Mother's Day? How did you know? I'm looking at it. in the script right now. Okay, fine, fine, fine. Not a good question. Anyway, Mother's Day is coming up, and we want to hear from the moms. So if you have a money question, it could be anything relating to building wealth,

how you can budget to financially care for your aging mom, preparing for your kids for a windfall in case they inherit some of your money, and even how you can shift your money mindset so that it positively influences your kids. Whatever your money question is, send them to us on the nerd hotline at 901-730, 6373, or you can email us at podcast at nerd wallet.com. Well, you know, Elizabeth, you've actually inspired me. I think I'm going to ask my mom what her money question is. That is genius.

And I actually would love to hear what your mom's money questions are. So make sure you text her after we record this. I will. I'm seeing her tonight, actually. I'll ask her then. Well, let's get to this episode's money question. It comes from a listener who shares your name, Elizabeth. Their name is Elizabeth.

Here it is. What's the difference between APR and APY? and how do they apply to savings accounts versus loans? Thanks, Elizabeth. So Elizabeth, go host Elizabeth. We're going to tackle this question ourselves. And this might seem like a really basic question, but it might trip some people up.

So I'm excited to get into it. So let's start things off and we can grill each other. You're going to take APR. I'll take APY. Let's do it. All right, let's go. So, Elizabeth, what's APR? Okay, so what is APR?

It means annual percentage rate. That's what APR stands for. And it's actually the annual cost of borrowing money. Now, it sometimes includes annual fees, and it's expressed as a percentage, which you may see on your credit card statement, for example. Now, APR is typically charged on balances that you leave on your credit cards, on your auto loans. I'm currently being charged APR on my loan, or your mortgages. As we know, borrowing money is seldom, if ever, free. So this is how credit card companies make their money by charging.

you on the balances that you leave. So, Elizabeth, there are a few different kinds of APR, right? There's variable and fixed. So break down those for us. All right, let's get into it. Fixed means that the rate is locked in for the life of the loan. So for example, let's give an example of a financial product that has a fixed APR. That could be a fixed rate mortgage loan. What happens here is that the rate is set when you take out the mortgage and then it's locked in for the life of the loan. Okay. And what about variable? Okay, so variable is kind of the opposite. And it means that the rate can change in response to market interest rates. Now, variable rates can change in line with a benchmark figure that's called the prime rate.

For anybody who's like, girl, what is the prime rate? It's just basically the lending rate that banks give to customers who have good credit. Now, an example of a product with a variable APR is a credit card. Yeah, and we see interest rates and credit cards change pretty quickly in response to things like the Federal Reserve changing their interest rates, right? So it can change from even one month to the next. So, Elizabeth, APRs can vary greatly from one product to the next or one person to the next depending on things like your credit score. But is there an average APR? Well, that depends on the type of loan.

APRs can vary widely, but it ultimately depends on the provider and with many things, your credit score. Now, let's use credit card APRs as an example to answer your question, Sean. Now, the Federal Reserve data says that the average credit card interest rate was 22% in November 2025. And that's the most recent month available as of this recording. I want to mention that a 22% interest rate is super high in some places and sometimes in the world, like in ancient Mesopotamia. An interest rate higher than 15% was deemed usurious and illegal. And now we accept 22% as just normal. And that's part of why credit card debt is so difficult to get out of.

And so expensive. According to Experian, as of March 2026, the average credit card interest rate was just above 19%. Still higher than the one you just cited, Sean. But APR can range from around 11% to just over 34%. That's high. Jeez, that is rough. Okay. But APRs on auto loans and mortgages tend to be much cheaper, right?

Yeah, that's right. APR on loans like a mortgage or auto loans are typically lower than the APR on credit cards. And can you guess why, Sean? Hmm, in part because it's a secured loan. You have some collateral in the form of a car or a house? That's right. So I don't even have the answer because you did. So exactly.

That's why it tends to be lower. Right. Okay. Well, let's talk about how APR is calculated. This can get a little confusing because it's the annual interest rate, but you're charged on any balance that you leave monthly. That's correct. I'm going to say the formula just for all of the math nerds out there

who are just itching to do the calculations on their own. Of course, it's different. for each type of loan, but for credit cards, APR equals, I hope you guys have your pen and paper ready, interest plus fees, divided by principal or the loan amount, divided by the number of days times 365 times 100. And there are some parentheses in all of these divisions and multiplications and things. So we might want to write it out and have it in the show notes for those nerds who really want to do this math themselves. Yes, or you could just check out one of our articles because we outlined it in there. But for those of us who do not enjoy doing math equations, there are APR

calculators that you can use online. And also on nerdwollet.com, we have a credit card interest calculator that you can use to figure out that APR. And we'll also link to that in the show notes for this episode. Now, Elizabeth, one thing I want to flag is that the terms APR and interest rate are often used interchangeably, but they're not always the same thing, right? No, they're not always the same thing. So with some financial products, these two things are actually different. Now, let's start with mortgages. With mortgages, APR and interest rates are actually different. The primary difference is that an APR includes the cost of a loan over time and any additional fees like discount points, closing costs, or loan origination fees. Whereas the interest is only the cost of a loan and it

doesn't include the fees. Now, on the flip side, in the case of credit cards, the APA, and the interest rate are the same thing. And that is all thanks to the Federal Truth in Lending Act, which required lenders to outline their interest rate as an APR, so you don't get blindsided by fees, and you can understand the total cost of your debt. Got a love when we have to have a law in place to prevent credit card companies from being creditori

with how they're charging us fees and interest. Yes, we're talking to you, credit card companies, if you're listening. Shady. All right. So we're all up to date on what APR is. Actually, knowing what yours is is a different story. So how can folks find the APR on their credit cards or other loans? Well, it's different for each type of financial product, but for credit cards specifically.

There is something called a Schumer box. It sounds very fancy and it's actually federally required. What it does is it outlines interest rates and fees, and you can usually find it on the first page of the card agreement that was mailed to you. If you are anything like me, you do not have that agreement anymore. But you can find your APR on your credit card statement in the interest charge calculation section. Now, on loans, you can just call your provider up and ask them what your APR is on the loan or check your loan documents. And I do want to give people out there who are shopping for loans a little tip.

Focus on the APR versus the interest rate for things like mortgages, auto loans, and personal loans. Because the APR includes fees, whereas interest rates do not. So they may try to market you that fancy little shiny interest rate that's lower than the APR. And then you might notice later if you decide to go through with the loan. that you're hit with all these other fees. Right. And remember that APR only shows you the interest accrued for one year and not the lifetime of the loan. That, again, is where calculators like the ones we have at nerveballot.com can be really helpful

when you're shopping around for the best rates. They'll help you see how much you're going to have to pay an interest over the lifetime of the loan. Now, let's take a mortgage, for example, just to lay this out. Say there's a $400,000 mortgage at 5.5% APR. You aren't just paying 5.5% one time. Over 30 years, you'll actually be paying back $417,000 in interest alone. Ooh. Meaning that you're paying back more than double what you borrowed.

A fun little tidbit that I learned in my CFP studies is that if your interest rate is 5.3% or higher, you'll be paying more in interest than you are paying for the principal for the loan itself. So pretty fascinating. Just that one little number is the turning point there. And I'm very grateful to be beneath that with my mortgage. But anyway, that is why some people make extra payments to lower the total amount they end up paying in interest because the more payments you have towards your loan, the faster you can pay it off and the less you'll pay an interest overall. Yes, I actually started doing that with my car loan last year. So I've been making extra $100 payments every month just to not pay as much in interest.

Yeah, I do not like paying interest. I don't like anyone to be paying interest unless they're paying it to me, I guess. Give me your money. Well, let's continue with this mortgage example. So say you have a 4.5% APR on that same mortgage loan that we mentioned, you'd be paying $329,000 in interest thereabouts. That would save you about $88,000 just from 1% less in APR. Isn't that huge? Massive.

Such a case for extra payments or shopping around for a lower APR. Yeah, if you can get it. Now, you can avoid APR altogether if you pay off your balances in full on credit cards. I know with things like mortgages and auto loans, it may not be that simple because of the size of the loan. But in terms of credit cards, if you get one with a 0% APR offer, that can also help you to avoid paying interest for a limited amount of time, of course, because that offer does not last for the lifetime of the credit card. For loan products, making extra payments, like Sean said, can reduce the amount that you pay an interest over the lifetime of the loan. But I think ultimately the goal should always be to find the lowest APR, so you're paying the least amount of it. interest on the loan or line of credit as possible.

I do have one more note for APRs. I want to tell you guys about something called a penalty APR. And this is a significantly higher APR that you can be hit with if you missed the minimum payment, due date on your credit card or you don't comply with other terms. And it can be applied to new purchases or balances. So please, if you can, pay your credit card bills on time. And if you don't think you can, call your creditor and try to explain the situation, get ahead of it instead of paying a penalty APR. Sean, it's your turn to do all the yapping now. You're going to tell us about what an APY is. APY stands for annual percentage yield and it's the annual rate of return on an account or an investment.

So unlike the interest rate, which tells you how much you'll be paid on money you invested or deposited, the APY includes the compound interest you earn. So in other words, it takes the interest rate and adds in compounding. And since we're doing basics here, let me explain compound interest really quickly. That's the interest you earn on the money in the account, the previous interest, and the new interest. So it's like interest on interest. It creates the snowball effect, which is how your money grows over time through investing. I love to hear that. Me too.

I mean, that's really the key to saving enough for retirement is having compound interest in things like your 401K or your IRA. So another thing about APY is calculated over a complete. year. So let's say you get a 4% APY on your high yield savings account. That's not 4% per month. It's spread out over a year and includes compounding again. So if you break that down monthly, the yield of a 4% APY is going to be about 0.33% each month. All right, Sean, for all of the math nerds out there, how is APY calculated? And can you give us an example? Yes. And just mentally prepare yourself for an onslaught of numbers and maybe get your pen and paper out again. So if you have access to the interest rate, you can use that to calculate your APY.

There are compound interest calculators like the one we have at nerdwollet.com, which is pretty solid and we'll link to that in the show notes that do all this math for you. But in case you really want to do it, let me lay out an example for you. So let's say you put in $2,000 into a 24-month certificate of deposit with a 4% APY. In the first year, you'd get $80 in simple interest, which is the interest you earn from the initial deposit without compound. The next year, you'd earn 4% APY on that initial $2,000 deposit and on the $80 you earned an interest from last year. And over time, this is all going to be snowballing for you. So this is the magic of how people get wealthy, Sean.

Yes, exactly. And one thing to know about APY compounding is that it happens annually, monthly, even daily. It depends on the kind of account and financial institution. But either way, the APY is calculated annually. The goal should be to find the highest APY to increase the amount. of interest that you can earn on your money. All right, Sean, so tell us what kind of products use APY. So many.

We already mentioned high-old savings accounts and certificates of deposits, but also money market accounts are another example of products that earn APY. CDs sometimes earn higher APY compared to high-lid savings accounts, but that's not always the case. So check and shop around a little bit there. The catch with a CD, though, is that you have to lock up your money for a period of time. That can be months or years. and if you want to access that money before the period of time is up,

you might face a penalty or lose some of your interest. And we don't want any of that. All right. Are APYs variable and fixed like APR, Sean? Yeah, they are. So like APRs, they can be fixed or variable. So savings accounts and some CDs are variable. If you have a high-elous savings account,

you've probably gotten a lot of email saying that your APY is changing slash going down because of the Federal Reserve interest rate changes. APYs are usually impacted by the federal funds rate, again, which the Federal Reserve sets. And that's why after a Fed meeting, you might notice that your APY drops or rises. Most recently, it's been dropping. I'm still grieving those COVID APYs on my high-yield savings account. It hasn't stopped going down since, you know. They were pretty nice.

I have to say, I'm kind of in a transitional period with my high-old savings account right now. I've been using the same bank for ages and ages. And my APY right now is 3.5 percent. not amazing, not horrible, but could be better. I recently opened a savings account at a new bank that has 4% APY. And now I just need to move all of my direct deposits over into that, which will happen eventually. That is the biggest pain, isn't it? I hate changing all my account. It's going to take me 20 minutes to do, but for some reason I just can't get myself to do it. So this is a good reminder. Well, people need to take into account the mental, how many minutes does it take

mentally to get yourself to do these tasks. That counts to, you know? That's it. It's like the time before to get yourself ready to do it. And then you actually do it. And then for me, afterwards, I need like 20 minutes just to look at my phone or take my dog for a walk. Yes, I can relate. That's why I'm laughing. Okay. Well, Elizabeth, can you just give us the bottom line about APR versus APY? I can. So the bottom line is Elizabeth, who asked us this question. APY is the interest that you earn while APR is the interest that you pay. with one you're giving and with the other one you are receiving. APR is used for money borrowed, whereas APY is used for money saved.

If you would like to nerd out on what APY versus APR is, we have an article on nerdwilet.com that you can use to dig in. Sean, what is the highest APR that you have paid on any financial product that you can think of? And also, have you ever calculated how much you actually ended up spending throughout the lifeline of the loan? So the highest APR I've ever actually paid interest on would probably be the credit card that I got in college. I mean, this was years ago at this point. So to be honest, I don't recall what the exact interest rate is.

But I'm sure it wasn't great. So there's that. I'm actually kind of glad I don't remember what I was paying because I would be angry at myself for paying that. But, you know, ahead of this conversation, I looked into my mortgage loan and I played with NerdVolet's Mortgage Calculator. and I learned that I'm going to pay about $100,000 an interest over the life of my loan. So thank you for asking me this question so I can look at this very scary number to see all the interests I'll be paying. Oh, no, I'm so sorry. But hey, I hope it's paying off, right?

You're getting a good ROI? I have equity. I'm renting it out. And again, my interest rate is less than 5.3%. So I'll be paying less an interest than I owe on the principal of my house, which makes me feel kind of good, I guess. some kind of a win in there. Yeah. Yeah.

What about you, Elizabeth? How have you related to your APRs and APYs over time? Yeah. For APRs, the only loan I've actually taken out is my car loan. And that is somewhere between 4% and 5%, so not astronomically high. But my business credit card has some crazy APR. I think it's around like 27%. It's extremely high.

Oh, geez. I hope you're not actually paying that, right? You're paying off your balance? Well, let me tell you, because we're transatlant. parent on this show, I was. And then I was like, girl, what are you doing when I started seeing that snowballing? So I was like, no, no, no. So I have paid it off in full. And yeah, I pay off the balance every time I use it. But it's extremely high. Yeah. I mean, like you said, it was snowballing. It's so easy for your debt to get out of control when the interest rate is so high like it is on a lot

of credit cards. Exactly. And I got mad at them. And I'm like, hey, look, I'm not giving you guys any extra dollars that I don't need to give you. Okay. I love it. Anger is a really good motivator for getting out of debt. It turns out. Sure is. Okay. Well, I think That's a wrap on APR versus APY. Listeners, if you have any other finance basics questions like this, we would love to answer them because this was super fun for us. It was. We got to nerd out and dig in, and hopefully you guys were able to follow along.

And if you weren't, let us know. We can take all of your financial questions about what were we even talking about this episode. We're happy to answer that. So turn to the nerds and call out or text us your questions on the nerd hotline at 901-7306373. It's 901-730 nerd. You can also email us at podcast at nurdwallat.com or leave us a comment on Spotify or YouTube. And you can also subscribe to the show on YouTube and see our beautiful faces there. We want you to come and join us next time.

We're going to be answering a listener question about the forever mortgage. And we'll be having a little debate there. So make sure you tune in so that you can hear that. Follow smart money on your favorite podcast app that includes Spotify, Apple Podcasts, and IHeartRadio to automatically download new episodes. And here's our brief disclaimer. We are not your financial or investment advisors. This nerdy info is provided for general educational and entertainment purposes and may not apply to your specific circumstances. This episode was produced by Tess Vigland, Hillary Georgie, helped with editing.

Eve Krogman edits our audio and our video. Huge thank you to NerdWallet's editors for all their help. And with that said, until next time, turn to the nerds. Hey, Smart Money listeners, we have a brand new email newsletter, and it's completely worth signing up for, especially since it's free. Every issue has clips from recent episodes, links to stories you might have missed, and also behind the scenes commentary from me, Sean, and our producer. Some of it is stuff that doesn't make it into the episodes, the context, the moments,

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