APR vs. APY: What Is the Difference?

Key Takeaways

• APR (annual percentage rate) is the yearly cost of borrowing, including fees; APY (annual percentage yield) is the yearly return on savings, including compounding.
• The difference between a nominal rate and its APY comes entirely from how often interest compounds.
• Lenders quote APR and banks quote APY, so compare loans by APR and savings accounts by APY.
• The more frequently interest compounds, the higher the APY for the same stated rate.

Two rates that answer different questions

APR and APY differ by a single letter, and they are constantly confused, but they answer opposite questions. APR tells you what it costs to borrow money over a year. APY tells you what you earn on money you save or invest over a year. One is a cost, the other is a return.

They share the same starting point, a nominal annual interest rate, but each adjusts that rate for a different real-world factor. APR folds in the fees attached to a loan. APY folds in compounding, the effect of earning interest on your interest. Knowing which factor each one captures is what keeps you from comparing a loan and a savings account as if their numbers meant the same thing.

The sections below define each rate, work through the math with an example, and show which one to reach for when you are shopping for a loan or a place to park cash.

What APR measures

APR is the annual cost of a loan expressed as a percentage, and crucially it includes fees, not just the interest rate^[1]. On a mortgage, that can mean origination fees, points, and certain closing costs. A loan with a 6% interest rate might carry an APR of 6.4% once those costs are rolled in.

That is exactly why APR is useful to a borrower: it captures the true price of borrowing in one number, which makes two loans comparable even when their rates and fee structures differ. Federal law requires lenders to disclose APR for this reason. You can see how rate and fees combine into a single figure with the APR calculator.

One caveat: a quoted APR usually assumes you keep the loan for its entire term. If you refinance or sell in a few years, the upfront fees are spread over less time, so your effective cost is higher than the quoted APR suggests. For mortgages specifically, the mortgage APR calculator shows how points and fees shift the number.

What APY measures

APY is the annual return on savings or an investment, and it accounts for compounding, the rate at which interest is added to your balance and then earns interest of its own^[2]. Because banks pay APY on deposits, it is the number you see advertised on savings accounts, money market accounts, and certificates of deposit.

The formula is APY = (1 + r / n) raised to the power n, minus 1, where r is the nominal annual rate and n is the number of compounding periods per year. That looks fussy, but the idea is simple: more frequent compounding means a slightly higher effective yield than the stated rate. The APY calculator does the arithmetic for you.

Unlike APR, APY has no fees baked in, because a savings account does not charge you fees to earn interest. APY is purely about how compounding turns a nominal rate into the actual percentage your balance grows in a year.

Why compounding drives the gap

A worked example makes the difference concrete. Suppose a savings account pays a 5% nominal rate compounded monthly. Using the formula, APY = (1 + 0.05 / 12) to the 12th power, minus 1, which works out to about 5.12%. The same 5% rate compounded daily lands a hair higher, near 5.13%. Compounded just once a year, the APY is exactly 5%.

So the account earning "5%" actually grows your balance by 5.12% over the year, because each month's interest starts earning interest itself^[3]. The gap looks small at these rates, but it widens as rates rise and as compounding gets more frequent, and it grows dramatically over many years.

This is why comparing two savings accounts by their stated rates can mislead you. An account at 4.9% compounded daily can beat one at 5.0% compounded annually. APY normalizes for compounding so the comparison is apples to apples.

Where fees fit in

The clean way to remember the split: APR is a rate plus fees; APY is a rate plus compounding. APR generally does not account for compounding on a loan, and APY never includes fees, because the two numbers were built for different sides of the ledger.

That difference has a practical edge. Because APR captures fees, a lender who advertises a low interest rate but heavy fees will still show a higher, more honest APR. Because APY captures compounding, a bank advertising APY is showing you the most flattering, but also the most accurate, picture of what you will actually earn.

Neither is being deceptive; they simply describe different things. The mistake is comparing an APR to an APY directly, or assuming the stated interest rate equals either one.

How to use each when you shop

When you borrow, compare offers by APR, not the interest rate. Two auto loans or mortgages with identical rates can cost very different amounts once fees are included, and APR is the one number that exposes that. Treat a low rate with a much higher APR as a signal to ask where the fees are hiding.

When you save, compare accounts by APY, not the nominal rate. APY already reflects compounding frequency, so the account with the higher APY genuinely earns you more, all else equal. It is the fairest one-number comparison for savings accounts and CDs.

Put simply: borrowing decisions live in APR, saving decisions live in APY. Keep the two straight and you will never be fooled by a headline rate that leaves out either fees or compounding.

Frequently Asked Questions

Is APR or APY higher?

For the same nominal rate, APY is higher than a simple interest rate because it includes compounding. APR and APY are not directly comparable, though, since APR is a borrowing cost and APY is a savings return.

Why do banks advertise APY but lenders advertise APR?

APY shows the most accurate return on savings after compounding, which favors the bank's pitch. APR shows the true cost of a loan including fees, which lenders are legally required to disclose.

Does APR include compounding?

Generally no. APR reflects the interest rate plus fees on a loan, but it does not typically account for compounding the way APY does.

Which rate should I use to compare savings accounts?

Use APY. It already accounts for how often interest compounds, so the account with the higher APY earns you more for the same deposit.

Can APR and APY be the same?

They can be numerically equal only in the narrow case of a product with no fees and annual (once-per-year) compounding. In everyday loans and savings accounts they differ.