APY vs. APR: What's the Difference?
Two acronyms, one letter apart, used in opposite corners of your financial life:
- APR (Annual Percentage Rate) describes what you pay to borrow — quoted on credit cards, mortgages, auto and personal loans.
- APY (Annual Percentage Yield) describes what you earn on deposits — quoted on savings accounts and CDs — and it includes compounding.
The compounding distinction is the whole story.
Why APY includes compounding (and APR mostly doesn’t)
A 5% rate compounded monthly doesn’t earn you 5% in a year — it earns about 5.12%, because each month’s interest starts earning its own interest. APY bakes that in, which is exactly why banks advertise deposit accounts in APY: it’s the honest (and slightly larger-looking) number for what you’ll actually earn in a year.
APR on loans is closer to a simple annual rate — and on credit cards, interest typically accrues daily (APR ÷ 365), so carrying a balance compounds against you in a way the headline APR understates. A card “at 24% APR” effectively costs about 27% annually if the balance rides untouched.
Mortgage APR: a different beast
On mortgages, APR serves a second purpose: it folds certain upfront costs (points, origination and some other fees) into an annualized figure, by law, so you can compare loans honestly. That’s why a mortgage’s APR is higher than its interest rate — and why comparing two lenders’ APRs (not just rates) reveals who’s hiding fees. The gap between rate and APR is itself information.
The practical rules
- Comparing savings accounts or CDs? Compare APY to APY. Compounding frequency is already accounted for — the higher APY wins, full stop.
- Comparing loans? Compare APR to APR — same loan type and term. For mortgages, the rate-vs-APR gap exposes fee-heavy offers.
- Never compare an APR to an APY. A 5.00% APR loan and a 5.00% APY deposit are not the same number in disguise — the conversion depends on compounding.
- On cards, remember daily accrual: the true annual cost of carried balances exceeds the sticker APR. One more reason carrying a balance is so expensive — see what happens if you only pay the minimum.
See compounding work in your favor with the compound interest calculator — the same force that makes card debt vicious makes savings quietly powerful.