APR (Annual Percentage Rate) vs APY (Annual Percentage Yield): What’s the Difference?
Side-by-Side Comparison
| APR (Annual Percentage Rate) | APY (Annual Percentage Yield) | |
|---|---|---|
| Definition | The yearly interest rate charged on borrowed money (loans, credit cards) or earned on savings. Includes fees and other costs. | The actual rate of return you earn on a savings account or investment in one year, including the effect of compound interest. |
| Example | A credit card with 22% APR means you would pay about $220 per year in interest on a $1,000 balance. | My savings account earns 4.5% APY, so $1,000 would grow to about $1,045 in a year. |
Understanding APR (Annual Percentage Rate)
APR is the number you should always look at first when comparing loans or credit cards. It includes not just the base interest rate but also lender fees, so it gives you a truer picture of what borrowing actually costs. A lower APR saves you real money over the life of a loan. For credit cards, if you carry a balance from month to month, the APR determines how much extra you pay. If you pay your credit card in full every month, APR matters less because you won't be charged interest at all.
Understanding APY (Annual Percentage Yield)
APY is the mirror image of APR but for savers instead of borrowers. Where APR tells you what you pay, APY tells you what you earn. The key difference between APY and a plain interest rate is that APY factors in compound interest. If two banks both advertise 4% on savings but one compounds daily and the other compounds monthly, their APYs will be slightly different. Always compare APY, not just the interest rate, when shopping for a savings account.
Learn More About Each Term
Frequently Asked Questions
What is the difference between APR and APY?
APR measures the cost of borrowing money and includes lender fees. APY measures the return on savings and includes the effect of compound interest. When borrowing, look for a low APR. When saving, look for a high APY.
Is APY or APR better for savings accounts?
APY is the better number to compare when choosing a savings account because it includes compound interest, giving you a more accurate picture of your actual earnings over a year.
Can APR and APY be the same number?
They can be very close but are rarely identical. APY will always be slightly higher than the equivalent interest rate because it factors in compounding. The more frequently interest compounds, the larger the gap between the two.
Practice Banking Concepts Hands-On
Understand APR (Annual Percentage Rate) and APY (Annual Percentage Yield) by experiencing them in a realistic banking simulator.