APR vs APY: What's the Difference?
APR and APY look similar but mean different things — one is what you pay, the other is what you earn. Understanding compounding is the key.
Try the apr calculatorPut these numbers to workOpen →APR (annual percentage rate) and APY (annual percentage yield) both describe an interest rate as a yearly percentage, but they answer different questions. APR is normally used for what you borrow; APY for what you earn. The difference between them comes down to one thing: compounding.
APR — the cost of borrowing
APR is the yearly rate a lender charges, and on loans it usually also folds in certain fees to show the true annual cost of the credit. Crucially, a quoted APR does not assume the interest compounds on itself — it's a simple annual rate divided into your payments. That's why it's the standard figure for mortgages, car loans and credit cards.
APY — the power of compounding
APY describes what you actually earn (or, on revolving debt, truly pay) once interest compounds — that is, once you start earning interest on your interest. The more often interest compounds (daily, monthly, quarterly), the higher the APY climbs above the stated rate.
A quick example
A savings account paying 5% compounded monthly doesn't earn you exactly 5% over the year — it earns about 5.12% APY, because each month's interest starts earning interest too. The 5% is the nominal rate; the 5.12% is what actually lands in your account.
What to compare
- •Comparing savings accounts or CDs? Compare APY — it reflects compounding, so it's apples-to-apples.
- •Comparing loans or credit cards? Compare APR — the standard, fee-inclusive cost of borrowing.
- •Watch the compounding frequency: two accounts with the same nominal rate can have different APYs.