APR vs APY
Two annual rates that measure completely different things — and mixing them up costs you money.
What Is APR?
APR (Annual Percentage Rate) is the yearly cost of borrowing money, expressed as a percentage. It includes the interest rate plus any fees (origination fees, mortgage points, etc.) amortized over the loan term. APR does not account for compounding.
APR is required by law to be disclosed on all U.S. loans under the Truth in Lending Act. It lets you compare the true cost of different loan offers, since a loan with a lower interest rate but high fees might have a higher APR than a loan with a slightly higher rate and no fees.
Use APR when: comparing mortgages, auto loans, personal loans, or credit cards.
What Is APY?
APY (Annual Percentage Yield) is the effective annual return on a savings or investment account, accounting for the effect of compounding. The more frequently interest compounds, the higher the APY relative to the stated interest rate.
APY is required to be disclosed on all U.S. deposit accounts under the Truth in Savings Act. Banks advertise APY — not interest rate — because it shows the actual return you'll earn in a year.
Use APY when: comparing savings accounts, CDs, money market accounts, or any account that pays you interest.
APR vs APY: Side-by-Side Example
Both accounts below have a 5.00% stated annual rate — but different compounding frequencies:
| Account | Rate | Compounds | APY | $10k earns |
|---|---|---|---|---|
| Annual compounding | 5.00% | Annually | 5.00% | $500 |
| Monthly compounding | 5.00% | Monthly | 5.12% | $512 |
| Daily compounding | 5.00% | Daily | 5.13% | $513 |
For a credit card at 24% APR compounding daily:
Effective APY = 26.82% — the actual rate you pay on a carried balance is nearly 3 percentage points higher than the advertised APR.
The Quick Rule
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