APR vs APY: what’s the difference?
APR is a yearly borrowing cost; APY is a yearly savings yield that includes compounding. Here’s how to read each.
Sourced from official pages · Updated September 30, 2026💡 Key takeaways
- APR describes the yearly cost of borrowing; on loans it can include certain fees.
- APY describes what you earn on deposits in a year, including compounding.
- Compare APR to APR for loans and APY to APY for savings.
- Savings APYs are often variable; CD APYs are fixed for the term.
APR (annual percentage rate)
APR expresses the yearly cost of borrowing. On loans it can include certain fees along with interest, which is why lenders must disclose it under the Truth in Lending Act. On credit cards, the APR is the yearly interest rate applied to balances you carry, usually shown as a variable range.
APY (annual percentage yield)
APY is used for deposit accounts. It shows what you earn in a year including compounding. Two accounts with the same rate can have different APYs if they compound at different frequencies, so compare APY to APY.
Why it matters
- Comparing loans: use APR, not the interest rate alone, because APR includes some fees.
- Comparing savings accounts and CDs: use APY.
- Savings APYs are often variable; CD APYs are fixed for the term.
Try it
Use the savings calculator to see APY in action, or the loan calculators, which show an effective cost (APR) that includes lender fees.
APY and compounding
The same nominal rate produces different yields depending on how often interest compounds. For example, 5% compounded monthly gives an APY of about 5.12%. The more frequent the compounding, the higher the APY for the same nominal rate.
When APR misleads
A loan with a low interest rate and high fees can have a higher APR than a loan with a slightly higher rate and low fees. On a mortgage, compare APRs on the Loan Estimate and total costs, not the rate alone.
🔤 Key terms
| Term | Meaning |
|---|---|
| Nominal rate | The stated rate before compounding |
| Compounding | Interest earning interest |
| APR | Yearly cost of borrowing |
| APY | Yearly yield on deposits including compounding |
⚠️ Common mistakes to avoid
- Comparing an APR to an APY.
- Choosing a loan by rate alone.
- Assuming a savings APY is guaranteed.
- Ignoring fees that drag down a deposit account’s real return.
🛠️ Try it yourself
❓ Frequently asked questions
Why do credit cards quote APR?
Because they describe the yearly interest on balances you carry.
Which is higher, APR or APY?
For the same nominal rate, APY is higher because it includes compounding.
Where do I find the APR on a loan?
On the disclosure the lender gives you, such as the Loan Estimate.
Which do banks advertise for savings?
APY.
📚 Sources
This guide is general information, not financial, tax or legal advice. Rules and limits change; confirm with the sources above or a licensed professional.