APR vs. APY: What's the Difference When It Comes to Interest Rates?

APYs take the power of compounding interest into account whereas APRs do not

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It’s easy to confuse APR (annual percentage rate) and APY (annual percentage yield). Both tell you how much you’ll pay or earn in interest, both are expressed as a percentage, and both express the cost or profit over the course of a 12-month period. But there is one big difference between the two: The APY accounts for compound interest while the APR does not. Because of this, the APY gives a more accurate rate of interest.

Let’s take a closer look at APR and APY to see how these two terms differ in meaning and application.

Key Takeaways

  • APY takes compound interest into account while APR does not.
  • APR is typically used to advertise loans and credit cards while APY is used by institutions advertising deposit accounts.
  • The more frequently interest is compounded, the larger the difference between APR and APY.

What’s the Difference Between APR and APY?

An APR is the annual percentage rate on a savings or borrowing product and represents the cost someone pays each year to borrow money; this includes fees. The APY is the “actual rate” someone earns on a balance. Essentially, the APY measures the total amount someone pays in interest while taking the frequency of compounding into account.


APY can also be called the EAR (effective annual rate).

Represents fees and interest to pay Represents compounded earnings or debt
Measures interest charged Measures interest earned
Used to advertise credit accounts Used to advertise deposit accounts

Borrowing or Earning Amount 

An APR reflects both the fees and interest rate associated with borrowing or earning money. The higher the APR, the more you will pay over the life of the loan. APY also determines the interest you’ll earn or pay, and takes the power of compounding interest into account.


Because it includes fees, lenders use the APR, expressed as a percentage, rather than just the interest rate when advertising their products.


Both APR and APY measure interest. When divergence between the two figures occurs, it’s because APR measures the rate of interest charged on an annual basis without accounting for compounded interest. The more frequently interest is compounded, the larger the difference between APR and APY.


While both the APY and APR can apply to credit products or deposits accounts, you’ll hear APR and APY more commonly referenced with one type of financial product over the other. APYs are used more often to advertise interest-earning accounts such as savings accounts, money market accounts, or certificates of deposit (CDs). Lenders are more likely to reference the APR when talking about credit products such as credit cards or personal loans.

Which Is Right for You?

While the APR gives a good baseline of what it will cost you to borrow money from a lender, the APY gives a much clearer picture if you were to borrow or save money on a long-term basis. The APY accounts for the actual rate someone will earn or pay in interest over time as the interest compounds. If you were to only carry a credit card balance for a month, the APR tells you what you need to know. If you plan to carry a balance for many months or years, then the APY will help you calculate how that debt will grow over time. APY is also preferable when it comes to determining how much you’ll earn over the long term in a CD or savings account.

APR vs. APY Example

To make it easier to understand how APR vs. APY works, it can be helpful to learn how their equations differ.

Let’s start with the APR on a monthly basis since this gives you an idea of what happens if compounding isn’t involved.

Monthly APR = (Interest/12 months) x Balance

For example, if you owe $1,000 on a credit card and the APR is 12%, then you will divide 12% by 12. This brings you to 1%. So $1,000 multiplied by 1% equals $10 a month in interest charges. This would be an amount of $120 a year.

To calculate your APY, you’ll use the following formula:

APY =100 x (1 + i/n)^n − 1

r = interest rate

n = number of compounding periods per year

When you plug in the same numbers in the above example, you end up with an APY of 12.68%, which means you’ll pay $126.80 in interest annually.

APY = 100 x (1 + .12/12)^12 − 1

APY = .1268% / 100 x $1,000

In this scenario you would pay $6.80 more per year in interest charges. That may not seem like a lot, but increase the interest rate and balance, and you can see why understanding your APY comes in handy.

How Interest Rate Environments Affect APR and APY

When an APR is a fixed rate, it doesn’t change over the life of the loan or savings product. However, a variable APR changes over time and is susceptible to changes in the broader interest-rate environment.

For example, when the Federal Reserve executes an interest-rate hike, it becomes more expensive to borrow money. Thus, you may see a higher APR for your credit card or auto loan and a higher APY on savings accounts and CDs.

The opposite is true as well. When interest rates are cut—as they were in March 2020 in response to the COVID-19 pandemic—APYs and APRs are lower.

Frequently Asked Questions (FAQs)

Which is typically higher, the APR or APY?

While the APY is not a higher interest rate than the APR—the interest rate remains the same—the APY associated with a lending or savings product ends up reflecting a higher total interest that will be earned or paid because it takes the effect of compounding interest into account.

How can a lender use APR vs. APY to make a loan seem more appealing?

Any borrowing or savings product will have an APR and APY, but financial institutions tend to focus on just one in advertisements. Pay attention when it comes to borrowing money as advertisers like to focus on the APR, not the APY (the true cost of borrowing money over time). For deposit accounts such as CDs, advertisements focus on the APY, which usually reflects more long-term growth opportunities—not what you’ll earn for shorter terms.

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The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. Federal Deposit Insurance Corporation. “6500 - Consumer Protection.”

  2. Consumer Finance Protection Bureau. “What Is the Difference Between an Interest Rate and the Annual Percentage Rate (APR) in an Auto Loan?

  3. Board of Governors of the Federal Reserve System. “Federal Reserve Issues FOMC Statement.”

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