APR vs APY: Key Differences Explained
Learn the difference between APR and APY and how compounding affects the true cost of a loan or the true yield of a savings account.
Quick Answer
APR is the simple annual rate (used for loans); APY includes compounding (used for savings) and is always equal to or higher than APR.
| Feature | APR | APY |
|---|---|---|
| Annual Percentage Rate — does not include compounding | Annual Percentage Yield — includes compounding | |
| Used for loans and credit cards | Used for savings and deposit accounts | |
| Usually the lower number for the same rate | Usually the higher number for the same rate | |
| May include fees in its calculation | Focuses purely on interest compounding |
APR represents the yearly cost of borrowing money expressed as a simple interest rate, sometimes including fees. Lenders are required to disclose APR so borrowers can compare loan offers on equal footing.
APY reflects the actual return you earn on a deposit over one year, accounting for the effect of compounding. A savings account advertising 5% APY will earn more than 5% simple interest because earned interest itself earns interest.
When to Use APR
- Comparing mortgage or auto loan offers
- Understanding the true cost of credit card debt
- Evaluating loan fees alongside interest
When to Use APY
- Comparing savings account or CD yields
- Understanding the real return on deposits
- Evaluating compounding frequency impact
Worked Example
A 5% nominal rate compounded monthly.
APR
APR: 5.00% (stated rate).
APY
APY: 5.12% (effective rate after compounding).
The 0.12% difference comes from interest compounding on itself each month.
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Frequently Asked Questions
Can APR and APY be the same?
Yes, when interest compounds only once per year (annually), APR equals APY.
Why do banks advertise APY?
APY is the higher number, which makes savings products look more attractive to depositors.
Does APR include fees?
For mortgages, yes — APR includes origination fees and points. For credit cards, it typically does not.