If you’ve ever compared bank accounts or loan offers, you’ve seen both “APR” and “APY” — often in fine print that seems designed to confuse. They are different, and which one you should focus on depends entirely on whether you’re borrowing or saving.
APR: Annual Percentage Rate
APR (Annual Percentage Rate) represents the annual rate of interest charged for borrowing money. For loans, it includes the interest rate plus most fees — origination fees, closing costs, and other charges — expressed as a yearly percentage.
Key points about APR:
- Used for loans, credit cards, mortgages
- A lower APR means a cheaper loan
- APR does not account for compounding within the year
- On credit cards, APR is the nominal rate — what you’d pay if interest only compounded annually (it actually compounds daily)
Example: A credit card with 20% APR charges 20% ÷ 365 = 0.0548% per day on your balance. If you carry a $1,000 balance for a year, the actual interest owed is slightly more than 20% due to daily compounding.
APY: Annual Percentage Yield
APY (Annual Percentage Yield) is the effective annual rate that accounts for compounding within the year. It’s higher than the nominal rate and more accurately represents what you’ll actually earn (on savings) or pay (on debt).
Key points about APY:
- Used for savings accounts, CDs, investment returns
- A higher APY means more earnings on savings
- APY always ≥ APR (because it includes compounding)
- Also called EAR (Effective Annual Rate) in some contexts
The formula: APY = (1 + r/n)^n − 1
Where r = nominal annual rate, n = compounding periods per year.
The same rate, different numbers
Here’s how a 20% nominal rate looks at different compounding frequencies:
| Compounding | APY |
|---|---|
| Annually | 20.00% |
| Quarterly | 21.55% |
| Monthly | 21.94% |
| Daily | 22.13% |
The underlying rate is 20% in every row — but the APY differs based on how often interest is applied.
When APR matters vs. when APY matters
Use APR when borrowing:
- Comparing mortgage rates
- Comparing car loan offers
- Understanding the true cost of a personal loan
For mortgages, the APR includes lender fees, so it’s more comprehensive than just the interest rate. A loan with a lower interest rate but high fees might have a higher APR than a competing offer.
Use APY when saving:
- Comparing high-yield savings accounts
- Comparing CD rates
- Evaluating investment returns
Banks are required by law (Regulation Z in the US) to disclose APR on loans and APY on savings products — so you’re usually looking at the right number automatically. The problem arises when you try to compare a savings rate to a borrowing rate.
Why credit cards are confusing
Credit cards quote APR, but interest actually compounds daily. This means the real annualized cost of carrying a balance is the APY — not the APR.
A credit card advertising “20% APR” has an actual APY of about 22.13% when you carry a balance. This is why credit card debt is more expensive than it appears.
Quick reference
| I’m… | Look at… | Why |
|---|---|---|
| Taking out a mortgage | APR | Includes fees, true cost |
| Comparing savings accounts | APY | Includes compounding, true earnings |
| Borrowing with a credit card | APY | Your real annualized cost is higher than APR |
| Comparing CD offers | APY | Accounts for compounding frequency |
The practical takeaway
For savings, always compare APY — it’s what you’ll actually earn. For borrowing, compare APR — but understand it may slightly understate your true cost (especially for credit cards).
When in doubt, use our Compound Interest Calculator to model the actual impact of different rates and compounding frequencies on your specific situation.