APR vs. APY: What's the Difference?

APR and APY are two of the most confused acronyms in personal finance. They're only one letter apart, both are percentages, and both describe interest — yet mixing them up can cost you money. Here's the difference, in plain English.

The quick version

• APR (Annual Percentage Rate) is the cost of borrowing. You'll see it on loans, mortgages and credit cards. Lower is better.
• APY (Annual Percentage Yield) is the reward for saving. You'll see it on savings accounts, CDs and money-market accounts. Higher is better.

A simple way to remember it: APR is what you pay, APY is what you earn.

What makes them different

The two acronyms differ in what they fold into the headline number.

APR includes fees. It's designed to show the true annual cost of a loan, so it bundles the interest rate together with mandatory charges like origination fees and points. That's why a loan's APR is usually a little higher than its stated interest rate — and why comparing loans by APR is fairer than comparing rates alone.

APY includes compounding. It reflects the interest rate plus the effect of interest compounding over the year. Because savings products rarely carry fees, what you see is what you get. The more frequently an account compounds, the higher its APY for the same nominal rate.

A quick example

Say two savings accounts both advertise a 5% nominal rate. One compounds annually (APY 5.00%), the other daily (APY about 5.13%). Same headline rate, but the daily-compounding account actually pays you more — and the APY is what reveals that. This is exactly why regulators require deposit accounts to show APY: it lets you compare fairly.

On the borrowing side, two loans might both quote 7% interest, but one charges heavy fees and the other almost none. Their APRs will differ, and the APR is what exposes the cheaper deal.

Which one should you look for?

• Borrowing? Compare by the lowest APR — it captures both interest and fees.
• Saving? Compare by the highest APY — it captures the full effect of compounding.

Get this backwards and you might pick a loan that looks cheap but isn't, or a savings account that earns less than a rival.

See the numbers

Work out a loan's true yearly cost with the APR calculator, and find the effective yield on a savings account with the APY calculator. To see how compounding drives APY over time, our guide on how compound interest works breaks it down.