APR vs APY: what’s the difference?
APR and APY both describe a yearly rate, but APY accounts for compounding within the year and APR doesn’t. On savings, APY is what you actually earn; on loans, the fees-inclusive APR is what you actually pay.
| APR | APY | |
|---|---|---|
| Stands for | Annual Percentage Rate | Annual Percentage Yield |
| Includes compounding? | No | Yes |
| Includes fees? | Often (on loans) | No |
| Which number is higher | Lower | Higher |
| You see it on | Loans, credit cards, mortgages | Savings, CDs, investments |
Why APY is the higher number
If a rate compounds monthly, you earn interest on interest during the year, so the effective yield (APY) ends up above the stated APR. The more often it compounds, the bigger the gap — the same force behind compound interest.
Which one to trust
For savings, compare APY — it reflects real earnings. For loans, compare APR, which folds in fees for an apples-to-apples cost. Watch for ads that quote the flattering number: a low APR on a loan, a high APY on savings.
The verdict
They’re the same rate measured differently: use APY for what you earn (it includes compounding) and APR for what a loan costs (it often includes fees). When comparing offers, make sure both sides quote the same one. Model compounding in the Compound Interest calculator.
Frequently asked questions
- Is APY always higher than APR?
- If the rate compounds within the year, yes. With no intra-year compounding they’re equal; more frequent compounding widens the gap.
- Which matters for a credit card?
- The APR, and how it compounds (usually daily). Carrying a balance means that APR effectively becomes a higher APY working against you.
- Why do banks advertise APY on savings?
- Because it’s the larger, more attractive number — and it’s the honest figure for what you’ll actually earn, since it includes compounding.
Settle it with your numbers
Free, in-browser calculators for everything above.