APR vs. APY

APR and APY both express annual rates, but they answer different questions. APR (annual percentage rate) describes borrowing cost on loans and credit. APY (annual percentage yield) describes what you earn on savings after compounding. Confusing the two can make a loan look cheaper or a savings account look richer than it really is.

What APR measures

APR is a standardized way to represent the cost of borrowing over a year. For mortgages and many consumer loans, it includes the interest rate plus certain finance charges spread over the loan term.^[1] Lenders must disclose APR on most consumer credit so borrowers can compare offers on a similar basis — though not every fee appears in APR, and promotional rates may differ from the long-term APR.

A loan advertised at 6% interest might carry a 6.4% APR if origination fees are included. When comparing two personal loan offers, the lower APR usually means lower total borrowing cost — but only if you compare the same loan amount, term, and fee structure.

What APY measures

APY reflects how often interest compounds on a deposit account. Under U.S. Truth in Savings rules, banks disclose APY so savers can compare accounts with different compounding schedules — daily, monthly, or quarterly — on equal footing.^[2] When interest compounds more frequently, APY is higher than the nominal rate even though the stated rate did not change.

Example: a savings account with a 4.00% nominal rate compounded daily might show 4.08% APY. A second account at 4.05% compounded monthly could show a lower APY despite the higher headline rate. Always compare APY when choosing where to park cash.

Why the same number can mean different things

APR on loans is typically simple annual cost before compounding effects on unpaid interest (though credit card APR compounds daily on balances). APY on savings is explicitly an effective annual rate after compounding. That is why a 5% APR on a credit card and a 5% APY on a high-yield savings account are not equivalent — one costs you money, one pays you, and compounding works in opposite directions.

The SEC’s Investor.gov compound interest tools illustrate how small differences in rate and compounding frequency grow over time.^[3] Use our APR/APY converter to translate between nominal and effective rates when comparing products.

When to use each metric

Use APR when shopping for mortgages, auto loans, personal loans, or credit cards. Pair it with total repayment and monthly payment figures — a lower APR on a longer term can still cost more overall.

Use APY when comparing savings accounts, money market accounts, and CDs. For CDs, also check whether interest is compounded into the balance or paid out, since that affects reinvestment. See our CD vs. high-yield savings guide for how term length and liquidity fit into the decision.

Common comparison mistakes

Comparing a loan’s interest rate to a savings account’s APY without context is misleading — they measure different sides of your balance sheet. On loans, comparing nominal rate instead of APR ignores fees. On savings, comparing nominal rate instead of APY understates accounts that compound daily. Always read the disclosure footnotes: promotional APY tiers, balance caps, and rate-change clauses can change the effective return after the intro period ends.