Banks love acronyms, and APY and APR are two of the most common. They look almost identical, but they answer different questions. Getting them straight makes it much easier to compare savings accounts, loans, and credit cards.
APY: what you earn
Annual percentage yield is the total return on a deposit over a year, including compounding — interest earned on your interest. You’ll see it on savings accounts, money market accounts, and CDs. Federal Truth in Savings rules require banks to disclose APY so consumers can compare accounts.
APR: what you pay
Annual percentage rate is the yearly cost of borrowing. On loans like mortgages and personal loans, APR includes the interest rate plus certain required fees, such as origination fees. We explain that in APR vs. interest rate. On credit cards, the APR is essentially the interest rate.
The compounding difference
APR generally doesn’t reflect compounding. APY does. That’s why the two numbers differ even when they start from the same rate.
Take a 4.50% interest rate on savings:
- Compounded annually: APY = 4.50%
- Compounded monthly: APY ≈ 4.59%
- Compounded daily: APY ≈ 4.60%
The more often interest compounds, the higher the APY. The difference is small at these levels but grows with higher rates and longer time frames.
Why banks advertise the way they do
Notice the pattern: banks show you APY when they’re paying you (it’s the bigger number), and APR when you’re paying them (it’s the smaller-looking number, since it doesn’t include compounding). It’s not deceptive — both are required disclosures — but it’s worth knowing.
Credit cards: the APR understates the cost
Most credit cards calculate interest daily using a daily periodic rate (APR ÷ 365) and add it to your balance. So if you carry a balance all year, the effective annual cost is a bit higher than the stated APR. A 24% APR compounded daily works out to an effective rate of roughly 27%. The simple fix: pay your statement balance in full each month and the APR doesn’t matter. If you can’t, look at balance transfer options.
How to use these numbers
- Comparing savings accounts or CDs? Compare APY. See high-yield savings vs. money market and our CD ladder guide.
- Comparing loans? Compare APR for the same term, then check total repayment.
- Comparing credit cards? Look at purchase APR, balance transfer APR, cash advance APR, and penalty APR — they’re often different.
Variable vs. fixed
Most savings APYs are variable — banks can change them anytime. CD APYs are fixed for the term. Credit card APRs are usually variable and tied to the prime rate. Many personal loans and mortgages offer fixed APRs. A great rate today isn’t guaranteed tomorrow unless it’s fixed.
The CFPB has more explanations of how banks must disclose rates and fees. For the bigger picture of how rates change over time, the Federal Reserve publishes its policy decisions and data.
Bottom line
APY is what you earn, including compounding. APR is what you pay to borrow, including some fees. Compare APYs when you save and APRs when you borrow — and always check whether a rate is fixed or variable. You can see how consistent growth over time adds up in our year-over-year explainer.
