APY vs APR: Understanding the Key Differences

APY vs. APR can be confusing at first, but knowing the difference is key when comparing savings and loans. This quick guide breaks down APY versus APR differences, when to look at which one, and why understanding the difference between APR and APY matters in real-life money decisions.

The major difference between APR and APY comes down to what they’re used for.

APR (Annual Percentage Rate) is used for loans and credit. It shows how much borrowing money will cost you over a year. You’ll see it on things like mortgages, car loans, or credit cards. APR might include extra fees but doesn't factor in how often interest is charged (compounding isn’t included).

APY (Annual Percentage Yield) is used for savings and investments. It shows how much money you’ll earn in a year, and it does include compounding, which means it gives a more realistic idea of your actual return — especially when interest is added daily or monthly.

Both annual percentage yield and annual percentage rate give you interest rates over a year, but the result can be pretty different, depending on how often interest is added. It matters, for example, when comparing credit cards, loans, or savings accounts. Knowing the difference between APR and APY helps you make the best possible decision (or pass that exam).

At our website, you'll encounter thousands of cool calculators, and obviously, we have one to calculate APY as well. Check out this APY calculator 🇺🇸 to practice the subject instead of just reading theory. But, if you do prefer theory for some reason, we prepared a table comparing some of the APR vs APY differences:

APR stands for Annual Percentage Rate. It's the number that shows you how much it costs to borrow money for a year. You'll see it on loans, credit cards, mortgages, etc.

It shows the interest rate, sometimes with extra fees included (like for taking out a loan). So it's more useful than just looking at the regular interest rate — it usually gives you better information than interest rate alone. Perhaps the most important difference in the discussion on APY versus APR is that the APR doesn't include compounding. So if your interest is added monthly or daily, the real cost could end up higher than what APR says.

You use APR when:

• You want to know how much a loan will cost you;
• You're comparing credit offers; or
• You want to count in the extra fees.

In short: APR is often optimal for estimating the cost of borrowing.

APY stands for Annual Percentage Yield, and it shows you how much you’ll actually earn out of your savings or investments in a year. As we stated before, it includes compounding which is the main difference when comparing APY and APR.

Let’s say you have a savings account that gives you 4% interest and compounds monthly. Your APY won’t be exactly 4% - it’ll be a bit higher, like 4.07%. That’s because interest is added each month (because of monthly compounding), and you earn a bit more on top of what you already earned.

The more often it compounds, the more you earn. That's why APY is usually a bit higher than the rate banks advertise.

You use APY when:

• You're checking out savings accounts or investments;
• You want to know what you’ll really earn after compounding; or
• You're comparing options from different financial institutions.

To really understand the difference between APY and APR, we can discuss how they show up in everyday life situations. Whether you're saving money in a bank, paying off a credit card, or taking out a mortgage, APY and APR will be more or less helpful (or sometimes correct/wrong to use).

1. Credit card — Let's say your credit card has a 20% APR, which means that you'd pay 20% in interest per year. But since interest compounds daily or monthly, the real cost will be closer to 22% which is closer to what we'd calculate from APY formula. The APR itself doesn't include compounding, but the way credit card companies calculate your actual interest charges does, so it's worth calculating APY as well as APR before committing, and you can use our APR calculator 🇺🇸 to make it extremely easy! (Note that APY is called EAR in the APR calculator.)
2. Savings account — You put your money in a savings account with 4.00% interest, compounding monthly. Your APY will be something like 4.07%. Not a huge difference, but over time it adds up, so when you see "interest rate" on the financial product, calculate APY to count compounding in.
3. Mortgage — Loans use APR so you can compare offers more easily. But again, if interest compounds more often than once a year, you could end up paying a bit more than you expected. That's why knowing the difference between APR and APY can help you avoid unpleasant surprises. Prepare yourself by using our loan calculator 🇺🇸.

In personal finances, you'll see both APY and APR a lot, and they're both important — but they're used in different scenarios (usually more beneficial to the company offering you a financial product).

• Use APR when you're comparing loans, credit cards, car financing, or mortgages. The lower the APR, the less you'll pay.
• Use APY when you're comparing savings accounts, certificates of deposit (CDs), or investments. The higher the APY, the more you'll earn.

Just make sure you're comparing the same thing. Comparing APY to APR is usually pointless; you should use the one better suited for the job. So try to compare APY vs. APY or APR vs. APR for different products before making a decision.

Remember to keep in mind how often interest is added. Compounding daily vs. yearly can actually make a pretty big difference, especially over time.

To summarize:

• APR — How much you pay to borrow (no compounding)
• APY — How much you earn from saving (with compounding)

And remember that if you're not a fan of doing math by hand, use our APY calculator to figure it all out!

Written by: Dawid Siuda