Rates
APR vs. APY: The Difference Costs Real Money
APR and APY are one letter apart and point in opposite directions. APR — annual percentage rate — is what borrowing costs you per year. APY — annual percentage yield — is what saving pays you per year. Banks use both, always the one that flatters the product, and the gap between them is not a rounding error. Here's what each one actually measures and how to read them without getting played.
What APR measures
APR is the yearly cost of borrowing money, expressed as a percentage of what you borrowed. Crucially, it's not just the interest rate — it folds in most of the mandatory fees, too. On a mortgage, the APR includes the origination fee, points, and certain closing costs; on a personal loan, any upfront fee. That's the entire point of the number: federal truth-in-lending rules require lenders to disclose it so you can compare the real cost of two loans instead of two marketing rates. The CFPB's Ask CFPB library has the regulatory detail if you want it.
What APR does not capture: how often interest compounds. Which matters, as you're about to see.
What APY measures
APY is the yearly return on money you've deposited, including the effect of compounding — interest earning interest on itself (compound interest, the mechanism behind basically everything on this site). If a savings account compounds monthly, each month's interest joins the balance and earns its own interest the next month. APY is the honest total of that process over a year. Truth-in-savings rules require banks to quote it on deposit accounts, which the FDIC covers in its consumer resources.
Compounding is the whole difference
Take a credit card with a 24% APR. The card doesn't charge you 24% once a year — it charges roughly 2% a month (24 ÷ 12). If you carry a balance all year, each month's interest gets added to the balance and the next month's 2% applies to the new, larger number. Run it out: (1 + 0.24/12)12 − 1 = 26.82%. The card advertises 24%; the effective annual cost of carrying the debt is nearly three points higher. On a $10,000 balance, that's the difference between $2,400 and $2,682 a year — $282 that appears nowhere in the marketing.
Now the savings side, same math in reverse. A high-yield savings account advertising 4.00% APY with monthly compounding is actually paying a nominal rate of about 3.93% — the compounding lifts 3.93% up to the advertised 4.00% over a year. Nothing shady there; APY is the more truthful number precisely because it includes the compounding you'll actually receive. Our savings growth calculator compounds monthly, so what you see there is the real trajectory, not the nominal one.
Same bank, opposite framing
Here's the part worth being cynical about. The same institution will quote APY on your savings account — the bigger number, because compounding is included — and APR on your credit card — the smaller number, because compounding is excluded. Deposits get the flattering figure; debts get the modest one. This is entirely legal. In fact it's what the disclosure rules require: APR on credit, APY on deposits. The rules standardize the comparison within each category; nobody said the two categories had to use the same yardstick. Your job is just to remember that a 24% APR debt is really a ~26.8% problem, while a 4% APY account is really a ~3.93% engine.
When a number is doing marketing work, ask which direction the money flows. Bigger-looking numbers face the deposits; smaller-looking numbers face the debts.
Comparing loan offers: APR beats the rate
Two mortgage offers: Lender A quotes a 6.25% rate with $6,000 in origination fees and points; Lender B quotes 6.40% with none. The rates say A wins. The APRs — which fold those fees into the yearly cost — may well say B wins, depending on how long you keep the loan. That's why the APR exists: it converts "low rate plus a pile of fees" and "honest rate, no fees" into one comparable number. When you're shopping loans, line up the APRs, not the rates. (One caveat, covered in the questions below: mortgage APR assumes you keep the loan to full term, which most people don't.)
Where each number shows up
- Mortgages: both a rate and an APR appear on every offer. The gap between them is the fees. Compare APRs across lenders.
- Credit cards: APR only — often several of them (purchase, cash advance, penalty). If you carry a balance, the effective cost is higher than any of them, per the math above. Our credit card payoff calculator shows what a balance actually costs over time.
- High-yield savings accounts: APY, almost always variable — the bank can change it whenever it likes.
- CDs: APY, fixed for the term. The one place the advertised number is contractually locked in.
The one APR you can make irrelevant
A closing note of optimism: credit card APR — the ugliest number on this page — only applies if you carry a balance. Pay the statement balance in full every month and the grace period means you're charged no interest at all; a 24% APR and a 12% APR cost you identically zero. That makes card APR the one rate you can opt out of entirely, and it's why "what's the APR?" matters enormously for a balance you're carrying and not at all for a card you pay off. If you are carrying one, the payoff calculator above will show you what the effective 26.8% is doing to it monthly — the number is usually motivating.
Common questions
Is APR the same as the interest rate?
No. The interest rate is the price of the money alone; the APR adds most mandatory fees on top and expresses the total as a yearly percentage. If a loan has no fees, the two match. When they differ, the APR is the one telling the truth about cost.
Why is my credit card's daily periodic rate different from its APR?
Cards typically charge interest daily, not yearly. The daily periodic rate is just the APR divided by 365 (or 360, depending on the issuer) — a 24% APR works out to about 0.0658% per day, applied to your average daily balance. It's the same rate wearing smaller units, plus the compounding effect described above.
Does my savings account's APY change after I open it?
Usually, yes. Savings and money market APYs are variable — banks reprice them whenever market rates move, and sometimes just because they can. The 4% that lured you in carries no promise of being there next quarter. CDs are the exception: the APY is fixed for the term you signed up for.
Which number matters for a mortgage?
APR, for comparing offers — it's the only figure that accounts for the fees. One honest footnote: mortgage APR is calculated assuming you keep the loan for its full 30 years. If you'll sell or refinance in five, a low-rate-high-fee loan looks better on APR than it will perform for you, because you paid the fees upfront and never amortized them. Compare APRs, then sanity-check against how long you actually expect to keep the loan.
This article is general information, not personalized financial advice. How we write and review articles is covered in the editorial note on our About page.