APR vs APY: What's the Difference and Why It Matters
APR and APY appear on almost every loan offer and savings account, and they are easy to mix up. Knowing which is which helps you compare offers fairly and avoid paying more, or earning less, than you think.
APR: the yearly cost of borrowing
The annual percentage rate (APR) is the yearly cost of a loan, including the interest rate and certain required fees, spread over the loan's term. In the U.S., lenders must disclose it, which makes it the best number for comparing loans.
Example: a $10,000 loan at 8% for 36 months has a payment of $313.36. If the lender charges $400 in fees, you effectively receive $9,600 but repay the same amount, so the true APR is about 10.8%. Check any offer with the APR calculator.
APY: the yearly return on savings
The annual percentage yield (APY) is what your savings actually earn in a year, including the effect of compounding.
APY = (1 + rate ÷ n)n − 1
Example: a 4.5% rate compounded daily gives an APY of about 4.60%. On $10,000, that is about $460 of interest in a year. See the APY calculator.
The key difference
| APR | APY | |
|---|---|---|
| Used for | Loans and credit cards | Savings accounts and CDs |
| Includes fees? | Yes, required loan fees | No |
| Includes compounding? | No | Yes |
| You want it to be | Low | High |
A note on credit cards
Credit card APRs do not include compounding, but card interest compounds monthly in practice, so the effective yearly cost of a balance is a little higher than the APR suggests. A 24% APR is about 26.8% when compounded monthly.
How to use them
- Comparing loans? Compare APRs. A lower interest rate with high fees can cost more than a slightly higher rate with no fees.
- Comparing savings accounts? Compare APYs. They already include compounding, so higher is better.
- Planning long-term growth? Use the compound interest calculator.
This guide is for general education and planning. It is not personal financial, medical, tax or legal advice. See our disclaimer.
