APR vs. APY: What’s the Difference?
Two rates that sound alike but measure different things.
APR is the yearly interest rate without compounding, often used for loans. APY includes the effect of compounding, often used for savings. The more often interest compounds, the bigger the gap between them.
APR in plain terms
Annual percentage rate shows the yearly cost of borrowing, and for many loans includes certain fees.
It’s useful for comparing loans, but it doesn’t show the effect of interest building on interest.
APY in plain terms
Annual percentage yield shows what you actually earn in a year once compounding is included.
For example, 5% compounded monthly works out to about 5.12% APY.
Using them correctly
Compare loans using APR and savings accounts using APY.
Make sure you’re comparing like with like — an APR next to an APY can make one offer look better than it is.
Banks tend to advertise APY on savings (it’s higher) and APR on loans (it looks lower). Read which one you’re seeing.
Frequently asked questions
Does credit card APR compound?
Yes. Unpaid interest is typically added to the balance, so the effective cost can exceed the stated APR.
Is a higher APY always better?
For savings, generally yes — but check fees, minimums and whether the rate is introductory.
This guide explains a general concept; it isn’t a recommendation to buy, sell or borrow. For decisions about your own money, consider speaking with a licensed financial professional.
