APR vs APY: What Is the Difference?

APR (Annual Percentage Rate) and APY (Annual Percentage Yield) are both ways to express a yearly interest rate, but they measure different things. APR ignores compounding — it is the raw periodic rate multiplied by the number of periods in a year. APY factors in compounding, so it shows what you actually earn or owe over twelve months. The gap between them is small when rates are low and periods are few; it grows noticeably when rates are high or compounding is frequent.

What APR means and when lenders use it

APR is a standardized disclosure figure required by the US Truth in Lending Act (TILA). When you see a credit card advertised at "20% APR" or a personal loan at "12% APR," you are looking at the nominal annual rate before compounding is taken into account. For credit products, APR sometimes also includes certain fees — origination charges, closing costs, and similar items — rolled into a single percentage that allows you to compare lenders more easily. This broader version is often called the "APR including fees," and it is the number that must appear in mortgage Loan Estimates.

The key word in the definition is nominal. A 20% APR on a credit card that compounds monthly does not actually cost you 20% per year — it costs a bit more, because each month's interest is added to your balance and itself starts accruing interest. APR tells you the rate; APY tells you the cost.

What APY means and when banks use it

APY — sometimes called EAR (Effective Annual Rate) in academic or banking contexts — is the rate you actually experience once compounding is applied for a full year. The US Truth in Savings Act requires deposit accounts (savings accounts, CDs, money-market accounts) to disclose APY rather than APR, precisely because it is the more honest number for savers. When a savings account advertises "4.50% APY," that is exactly how much your balance will grow in a year if you leave it untouched, regardless of whether the bank compounds daily, monthly, or quarterly.

Because APY already bakes in the compounding, it is always equal to or greater than the corresponding APR. They are equal only in one scenario: when interest compounds once per year (annual compounding). In every other case — monthly, daily, continuous — APY exceeds APR.

The formula that connects them

You do not need to memorize this, but understanding the relationship helps you see why the gap grows with higher rates and more frequent compounding:

That 0.68 percentage-point difference may look small, but on a $50,000 balance it amounts to $340 extra per year — real money that the APR figure alone would not reveal.

Worked example: savings account vs credit card

The following table shows how APR and APY diverge at different compounding frequencies, all starting from a 12% nominal rate:

The lesson for borrowers: prefer APY when comparing loans, because it tells you the true annual cost. The lesson for savers: APY is already the right number on a deposit account — use it directly to compare offers.

Which rate to look at for borrowing

When you borrow money — mortgage, auto loan, credit card, personal loan — you want to compare products using APY (or EAR), not APR, because APY accounts for how often interest accrues against your balance. Credit cards in the US almost universally compound daily. A card advertised at "24% APR" has an APY of about 27.11% — that is the true annual cost of carrying a balance.

There is a practical complication: lenders are not required to disclose APY for credit products, only APR. You may need to calculate APY yourself, or use a calculator. For fixed-installment loans like mortgages and auto loans, the distinction matters less in practice because you are paying down principal every month, reducing the base on which interest compounds. For revolving credit (credit cards, lines of credit) where balances can sit unpaid, the APR-to-APY gap is most consequential.

Mortgages: the APR is broader than the rate

Mortgage APRs deserve a special note. The "interest rate" on a mortgage is the pure rate used to calculate your payment. The APR is wider — it folds in origination points, broker fees, and some closing costs spread over the life of the loan. A mortgage with a 6.75% interest rate might carry a 7.10% APR once fees are included. When comparing mortgage offers, the APR is the more apples-to-apples number for comparing total cost, even though the monthly payment is determined by the interest rate alone.

Which rate to look at for saving and investing

For deposit accounts — high-yield savings, CDs, money-market accounts — banks are required to advertise APY, which is exactly what you want. Compare APYs directly. A savings account offering 4.60% APY beats one offering 4.55% APY, full stop, regardless of how frequently each compounds.

For bonds and Treasury securities, yields are usually quoted in a semi-annual convention, which is neither standard APR nor APY. A 10-year Treasury quoted at a "yield to maturity" of 4.30% assumes semi-annual coupon payments; the effective annual yield is slightly higher. Bond math has its own conventions, but the conceptual logic — nominal rate versus effective rate after compounding — is the same.

A quick-reference comparison

Common mistakes and things to watch out for

• Comparing APR to APY across products. If one bank quotes a savings rate as APR and another quotes APY, you cannot compare them directly. In the US, savings accounts must use APY, but promotional materials are not always consistent. Check the fine print.
• Assuming a lower APR always means a cheaper loan. Two loans with the same APR can have different effective costs if they compound at different frequencies. Daily compounding on revolving credit is almost always more expensive than monthly compounding on installment loans.
• Ignoring fees in mortgage APR. A lower interest rate with high origination fees can produce a higher APR than a slightly higher rate with no fees. The loan with the lower APR is usually cheaper over the full term, but not always — if you plan to sell or refinance in a few years, the upfront-fee loan may cost more in practice.
• Treating APY as a guaranteed return. APY on a variable-rate savings account reflects the current rate, which can change. A CD locks in a rate; a high-yield savings account does not.

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