APR vs APY: What's the Difference?
APR and APY are everywhere — on loans, credit cards and savings accounts — and they're easy to mix up. The difference comes down to one thing: compounding.
APR — what you pay
APR (Annual Percentage Rate) is the yearly cost of borrowing, and it does not account for compounding. You'll see it on loans and credit cards. It often includes certain fees, which makes it a fairer way to compare the true cost of borrowing than the interest rate alone.
APY — what you earn
APY (Annual Percentage Yield) is the yearly return on savings, and it does include compounding. Because of that, APY is always a touch higher than the equivalent simple rate. You'll see it on high-yield savings accounts and CDs.
Why the difference matters
Notice the pattern: banks advertise APR on what you borrow (it looks lower because it ignores compounding) and APY on what you earn (it looks higher because it includes compounding). Same math, opposite marketing.
How to compare fairly
- Comparing loans? Use APR, and check whether fees are included.
- Comparing savings? Use APY, since it reflects what you'll actually earn after compounding.
- Comparing apples to apples — never pit an APR against an APY directly; convert to the same measure first.
See how compounding turns a rate into real earnings on the savings interest calculator.
See your earnings
Frequently asked questions
What's the difference between APR and APY?
APR is the yearly cost of borrowing and ignores compounding; APY is the yearly return on savings and includes compounding, so APY is slightly higher than the equivalent simple rate.
Is a higher APY better?
For savings, yes — a higher APY means you earn more. For borrowing you look at APR instead, where lower is better.
Does APR include fees?
Often, yes. APR is designed to capture the broader cost of a loan, frequently including certain fees, which makes it more useful than the bare interest rate for comparing loans.