APR vs APY looks like alphabet soup, but the difference between these two rates can quietly cost – or earn – you real money. One describes what you pay to borrow; the other describes what you earn when you save. Mixing them up is exactly what banks and lenders count on.
APR vs APY: the core difference
- APR (Annual Percentage Rate) is the yearly cost of borrowing, including certain fees. It does not account for compounding. You see it on loans, mortgages, and credit cards.
- APY (Annual Percentage Yield) is the yearly return on savings, and it does include compounding. You see it on savings accounts, CDs, and money market accounts.
The one-line rule: APR is what you pay, APY is what you earn – and APY includes compounding while APR does not.
Why the difference matters
Because APY includes compounding, it is always equal to or higher than the equivalent simple rate. Notice the pattern in how they are advertised: lenders quote APR on loans (leaving out compounding makes the cost look a touch lower), while banks quote APY on savings (including compounding makes the return look a touch higher). Both are showing you the more flattering number for their side.
A worked example
Say a savings account pays 5% interest compounded monthly. The simple rate is 5%, but because interest earns interest each month, the APY is about 5.12%. On $10,000, that is roughly $512 a year instead of $500 – a small gap that grows with larger balances and more frequent compounding. On the borrowing side, a credit card’s APR compounding daily means your effective cost is slightly higher than the stated APR suggests.
How to use each when comparing offers
- Comparing savings accounts or CDs? Compare APY to APY – it reflects your true earnings after compounding.
- Comparing loans or credit cards? Compare APR to APR – it reflects the true cost including fees.
- Never compare an APR to an APY directly; they measure different things.
Frequently asked questions
Is a higher APY always better? For savings, yes – it means you earn more. For borrowing, you want a lower APR.
Why does my credit card show an APR but charge daily? Card issuers apply a daily periodic rate (APR divided by 365), so interest compounds daily if you carry a balance – another reason to pay in full.
See compounding in action with our Compound Interest Calculator, compare real savings rates in our guide to the best high-yield savings accounts, and check loan costs with the Loan Calculator.