APR vs APY: What's the Difference and Which One Should You Compare?

APR and APY are two of the most confusing abbreviations in personal finance. Both express a yearly rate, but they answer different questions. APR is the yearly cost of borrowing without compounding. APY is the yearly return after compounding is included. Knowing which one you are looking at helps you avoid comparing apples to oranges.

Definitions

• APR (annual percentage rate) is the yearly interest rate on a loan or credit product. For many loans it also includes certain fees. It does not account for interest-on-interest within the year.
• APY (annual percentage yield) is the effective yearly rate on a savings product once compounding is included.

The formula that connects them

Here n is the number of compounding periods a year. When n is 1, APR and APY are equal. As n rises, APY rises above APR.

How big is the difference?

The gap grows with the rate, which is why high-interest credit cards are more expensive than their headline rate suggests.

Which to use when

Watch out for marketing

Lenders prefer to advertise low APRs, and banks prefer to advertise high APYs. Both are legitimate, but each shows the number that looks best for the product. A quoted APR on a loan does not always include every fee, and a high APY may only apply to a balance tier or a promotional period.

A quick example

If a savings account pays 4.5% interest compounded daily, the APY is about 4.60%. On $10,000, one year of interest is about $460. A credit card with 24.99% APR compounded monthly has an effective yearly rate near 28%, so a $5,000 balance left untouched grows by more than $1,400 in a year before payments.

For loans, see how interest and payments interact in How Auto Loan Payments Are Calculated. For savings growth, see Simple vs Compound Interest.

How credit card APR really works

Credit cards usually quote a variable APR, but interest is charged using a daily periodic rate. A 24.99% APR works out to about 0.0685% per day (24.99 ÷ 365), applied to your average daily balance. Because the daily charge is added to your balance, interest compounds on itself, which is why the effective yearly cost of a 24.99% card is higher than 24.99%. If you pay your statement balance in full each month during the grace period, you generally pay no interest on purchases.

Different kinds of APR

• Purchase APR applies to normal card purchases.
• Balance transfer APR applies to debt moved from another card, often with a promotional 0% period and a transfer fee.
• Cash advance APR is usually higher and charges interest immediately.
• Penalty APR may apply after missed payments.
• Introductory APR is a temporary low rate that changes afterward.

APY in savings accounts, CDs and money market accounts

Banks quote APY for savings products because it reflects compounding and makes accounts comparable. On a $20,000 deposit, an account paying 4.5% APY earns about $900 in a year, while an account paying 0.5% APY earns about $100. That is why comparing high-yield savings accounts matters. Check whether the advertised APY is variable, whether it requires a minimum balance and whether it applies only for a limited period.

Loan APR versus interest rate

The interest rate is the cost of borrowing the principal. The APR adds certain fees such as origination fees and points, so it is usually higher than the rate. This helps you compare loan offers fairly. A loan with a lower rate but heavy fees can have a higher APR than one with a slightly higher rate and no fees. When you compare mortgages, auto loans and personal loans, use the APR for cost and the rate for the payment calculation.

A quick comparison

Tips for borrowers and savers

• Borrowers: compare APR, fees and the total repayment amount, and ask whether the rate is fixed or variable.
• Savers: compare APY, minimum balances, withdrawal limits and whether the rate can change.
• Use a credit card payoff calculator to see how long a balance lasts at your APR.
• Read how minimum payments work before carrying a balance.

Key terms: annual percentage rate, annual percentage yield, nominal rate, effective annual rate, daily periodic rate, compounding frequency, variable APR, fixed APR, promotional rate, grace period.

Frequently asked questions

Is APY always higher than APR?
APY is higher than the nominal rate whenever interest compounds more than once a year. If compounding is only annual, the two are the same.

Does APR include fees?
For many regulated loans APR includes some fees, but the exact rules vary by country and product. Always read the disclosure.

Which is better for my savings, a higher APR or a higher APY?
Compare APY, since it already includes compounding and lets you compare accounts fairly.

Can APR be lower than the interest rate?
On most loans APR is equal to or higher than the interest rate because it includes fees. Some products with rebates or credits can show differences, but the usual rule is APR ≥ rate.

What is a good APY for savings?
It depends on the market. Compare current rates across online banks and credit unions, and consider whether the account is FDIC- or NCUA-insured in the United States or covered by a comparable scheme where you live.

How do I convert APR to APY?
Use APY = (1 + APR ÷ n)^n − 1, where n is the number of compounding periods per year. For 12% APR compounded monthly, APY is about 12.68%.