APR vs APY: What's the Difference?
The short answer: APR (Annual Percentage Rate) is the simple yearly cost of borrowing or the basic rate on a deposit, while APY (Annual Percentage Yield) factors in compounding interest. For loans, focus on APR to compare costs. For savings accounts and investments, APY tells you what you will actually earn.
| Dimension | APR | APY |
|---|---|---|
| Definition | Annual interest rate without compounding | Effective annual rate after compounding |
| Formula | APR = periodic rate × number of periods | APY = (1 + r/n)n − 1 |
| Compounding | Not included | Included |
| Best used for | Comparing loan costs, credit cards, mortgages | Comparing savings accounts, CDs, investments |
| Higher or lower? | Always ≤ APY when compounding occurs | Always ≥ APR when n > 1 |
What Is APR?
APR stands for Annual Percentage Rate. It expresses the cost of borrowing as a simple yearly percentage without accounting for how often interest compounds within the year. Lenders are legally required (under the Truth in Lending Act in the US) to disclose the APR on loans and credit cards, making it a standardized way to compare borrowing costs side by side.
For example, a credit card with a 2% monthly interest rate has an APR of 24%. However, because interest compounds monthly, the amount you actually pay if you carry a balance is higher than 24% of the principal. Use the APR to APY Calculator to convert between the two instantly.
What Is APY?
APY, or Annual Percentage Yield, tells you the real return (or real cost) once compounding is applied. The formula is APY = (1 + r/n)n − 1, where r is the nominal rate and n is the number of compounding periods per year. The more frequently interest compounds, the larger the gap between APR and APY.
Banks are required to advertise APY on deposit products in the US (Regulation DD), so you can directly compare savings accounts. Use the APY Calculator to find out exactly how much your savings will grow, and use the Compound Interest Calculator to model growth over multiple years.
Key Differences
The core difference is compounding. When a savings account compounds monthly at a 6% APR, the APY is roughly 6.17%. That 0.17-percentage-point gap sounds small, but on a $50,000 balance over 10 years it becomes hundreds of dollars. On a large mortgage or auto loan, the difference between the nominal rate and the APR (which also folds in some fees) can be even more significant.
- Loans and credit cards: Always compare APR. A lower APR means a lower borrowing cost, all else equal.
- Savings accounts and CDs: Always compare APY. A higher APY means more money in your pocket at year end.
- Compounding frequency matters: Daily compounding produces a higher APY than monthly compounding for the same APR.
Which Should You Use?
Use APR when you are shopping for a loan, mortgage, or credit card. Federal law requires lenders to disclose it, and it gives you a fair apples-to-apples comparison of the cost of debt. Use APY when you are comparing savings vehicles, certificates of deposit, or any product where your money earns compound interest. The APY Calculator and the Compound Interest Calculator make it easy to see the real numbers before you commit.
FAQ
Can APR ever equal APY?
Yes — when interest compounds only once per year (n=1), APR and APY are identical. This is rare in practice; most accounts compound monthly or daily.
Which is better: a high APY or a low APR?
They apply to opposite sides of your finances. A high APY is good (more earnings on savings). A low APR is good (less cost on debt). Neither is directly comparable to the other.
Do credit cards quote APR or APY?
Credit cards quote APR, but because interest compounds daily on most cards, the effective rate you pay on a carried balance is slightly higher than the stated APR. Use the APR to APY Calculator to find the true effective rate.