APR is the yearly cost of borrowing, quoted without compounding. APY is the yearly yield on savings, quoted with compounding included. When you borrow, compare APR. When you save or invest cash, compare APY. Comparing the two directly is how people end up thinking a 5% loan is cheaper than a 5% savings account when the maths says otherwise.
What APR actually means
APR stands for annual percentage rate. On a loan it is the interest rate applied to your outstanding balance, expressed as a yearly figure. On mortgages and some personal loans it also folds in fees and points, which is why a mortgage’s APR is usually a little higher than its headline “note rate”.
On a credit card, APR is the rate charged on a balance you carry. It does not include compounding in the quoted number, even though the card compounds monthly in practice. That gap is the reason a “24% APR” card costs more than 24% of the balance over a year.
What APY actually means
APY stands for annual percentage yield. It is the rate you actually earn over twelve months once interest is reinvested. A savings account advertising 5.00% APY will grow $10,000 to $10,500 in a year, regardless of whether interest is credited daily, monthly or quarterly.
APY exists so that accounts with different compounding schedules can be compared honestly. It is the number a bank must disclose on deposit accounts in the United States, and it is the only number worth comparing between two savings accounts.
The formula that connects them
APY = (1 + APR / n)n − 1
Where n is the number of compounding periods per year. If interest compounds monthly, n = 12. Daily, n = 365.
| Compounding | 12% APR | Equivalent APY |
|---|---|---|
| Annually | 12.00% | 12.00% |
| Monthly | 12.00% | 12.68% |
| Daily | 12.00% | 12.75% |
A worked example: the same 12% on both sides
You owe $10,000 on a card at 12% APR, compounded monthly, and you make no payments for a year.
Monthly rate = 0.12 / 12 = 1%. Balance after twelve months = $10,000 × 1.0112 = $11,268. You paid $1,268 in interest, not $1,200.
Now flip it. You put $10,000 in an account paying 12% APY and leave it for a year. You end with $11,200. The saver earns $1,200 while the borrower pays $1,268 on the same headline number — because the borrower’s rate compounds and the saver’s quote already includes it.
Where the difference actually bites
- Credit cards. Interest compounds monthly on carried balances, so the effective annual cost is higher than the quoted APR. Paying the statement balance avoids it entirely.
- Car loans and personal loans. Usually simple interest on a declining balance, so APR is close to the true cost. Fees are the part people miss.
- Mortgages. APR includes lender fees, so a lower rate with high fees can still have a higher APR. Compare APR, then compare the total closing cost.
- “0% APR” promotions. Often real, but the rate after the promo period is usually high, and some cards charge deferred interest from day one if you don’t clear the balance.
- Savings accounts. APY is the honest comparison. A 4.90% APY account beats a 4.85% nominal rate compounded monthly (4.96% effective) only if you do the maths — so just compare APY.
How to use this in a decision
- Borrowing: compare APR across offers, then check the fees included and whether the rate is fixed or variable.
- Saving: compare APY, never the nominal rate.
- Mixing both: if your savings earn 4% APY and a card charges 22% APR, every dollar paid to the card is a guaranteed 22% return. Pay the card first. This is the same logic as compounding working against you.
- Check the compounding. If a quote gives you a monthly rate, multiply it out before you compare it to an APY.
Frequently asked questions
Is APR always higher than APY?
No. On the same nominal rate, APY is always equal to or higher than APR, because APY includes compounding. APR is not a different interest rate — it is a different way of presenting it.
Which one should I use to compare credit cards?
APR, plus the fee schedule. All card APRs are quoted the same way, so APR is the fair comparison, even though the effective cost is slightly higher once interest compounds.
Why does my savings account show both a rate and an APY?
The rate is the nominal interest rate before compounding; the APY is what you actually earn. Use the APY.
Reviewed 22 October 2026. Educational content, not financial advice. See our disclaimer.
