APR vs APY — What's the Difference?
The two rates look alike but mean different things. Learn which one to compare when borrowing, which when saving, and how compounding creates the gap.
5 min read · Updated August 26, 2026
Banks quote loan rates as APR and savings rates as APY. That’s not an accident: each is the number that makes their product look best. Understanding the difference takes about five minutes and will save you from comparing apples to oranges for the rest of your life.
APR: the cost of borrowing
Annual Percentage Rate is the yearly cost of a loan expressed as a simple percentage. In the US, lenders are legally required to disclose it, and it must include not just the interest rate but also most mandatory fees — origination fees, discount points, some closing costs — spread over the life of the loan.
That’s why a mortgage advertised at 6.5% might show an APR of 6.7%: the extra 0.2% is the fees. When comparing two loans, APR is the fairer number, because a lender can’t hide fees behind a low headline rate.
APR does not account for compounding within the year. A credit card with 24% APR charges roughly 2% a month, and if you carry a balance the interest compounds monthly, so the real annual cost is closer to 26.8%.
APY: the return on saving
Annual Percentage Yield is the yearly return on a deposit including the effect of compounding. If a savings account pays 5% APR compounded monthly, you earn 5 ÷ 12 = 0.4167% each month, and each month’s interest earns interest itself. After a year you’ve earned 5.116% — that’s the APY.
APY = (1 + APR ÷ n)^n − 1where n is the number of compounding periods per year. Banks quote APY on savings because it’s the bigger number.
How much does compounding frequency matter?
Less than the marketing implies. At 5% APR:
| Compounding | APY |
|---|---|
| Annually | 5.000% |
| Quarterly | 5.095% |
| Monthly | 5.116% |
| Daily | 5.127% |
The difference between monthly and daily compounding on $10,000 is about a dollar a year. The rate itself and how long the money stays invested matter far more. You can check any combination in the compound interest calculator, which shows the effective APY next to the result.
The same rate, two very different numbers
Consider 6% on $10,000 over 10 years:
- As a borrower (APR, amortized loan), you’d pay about $3,322 in interest over the term.
- As a saver (APY, compounded monthly, no withdrawals), you’d earn about $8,194.
The saver earns far more than the borrower pays because the saver’s balance keeps growing while the borrower’s balance keeps shrinking. That asymmetry is the whole engine of long-term investing.
Which number to use when
| Situation | Compare on | Why |
|---|---|---|
| Choosing a mortgage or car loan | APR | Includes fees; lower is better |
| Choosing a credit card | APR, but note the compounding | Card rates compound daily or monthly |
| Choosing a savings account or CD | APY | Includes compounding; higher is better |
| Estimating investment growth | APY (or “annual return”) | Growth compounds |
A quick sanity check: if you’re paying, expect to see APR; if you’re earning, expect APY. When a lender quotes APY on a loan or a bank quotes APR on savings, ask why — the number they’re not showing you is the less flattering one.
Two related terms
- Nominal rate / stated rate — the raw interest rate before fees or compounding. The mortgage “rate” on a rate sheet is this.
- Effective annual rate (EAR) — same thing as APY, just the term used in finance textbooks and outside the US.
Putting it to work
- Comparing loan offers? Enter each APR into the loan calculator and compare total interest.
- Comparing savings accounts? Higher APY wins, full stop — compounding is already baked in.
- Projecting savings growth? Use the compound interest calculator with the APR and the account’s compounding frequency, or simply enter the APY with annual compounding — the result is the same.