APY vs APR: What's the Difference?

Both measure interest rates, but they work in opposite directions. APY is your friend (earning), APR is your cost (paying).

APY Explained (For Savings)

APY (Annual Percentage Yield) tells you how much you'll earn on deposits over one year, including the effect of compound interest.

When your bank pays 4.00% APY:

$10,000 becomes $10,400 after one year
Interest compounds (usually daily), earning interest on interest
APY already accounts for this compounding

APY is what matters when comparing savings accounts. A 4.00% APY is always better than 3.50% APY—no math required.

APR Explained (For Loans)

APR (Annual Percentage Rate) tells you the yearly cost of borrowing money, including interest and certain fees.

When your credit card charges 20% APR:

$1,000 balance costs ~$200/year in interest
APR includes interest rate + some fees
Doesn't always include compounding effects

For loans, mortgages, and credit cards, look for the lowest APR possible.

The Key Difference: Compounding

The technical difference:

APY includes the effect of compound interest
APR typically does not include compounding

This means APY is usually slightly higher than the "base" interest rate (because compounding adds value), while APR may understate your true borrowing cost.

Example: 4% Base Rate

Simple interest (no compounding) 4.00%

APY (daily compounding) 4.08%

Extra from compounding on $10,000 +$8/year

Where You'll See Each

APY Is Used For:

Savings accounts
Certificates of Deposit (CDs)
Money market accounts
Treasury bills and bonds

APR Is Used For:

Credit cards
Mortgages
Auto loans
Personal loans
Student loans

Why Banks Use Different Terms

Banks know what they're doing:

They use APY for savings because it's the higher-sounding number (includes compounding)
They use APR for loans because it's the lower-sounding number (excludes compounding)

Both are technically accurate, but the choice of which to display is strategic. Always compare like with like—APY to APY, APR to APR.

The Bottom Line

Simple rules:

Saving money? Look for the highest APY
Borrowing money? Look for the lowest APR

Both matter, but APY is your friend (money coming in) while APR is your cost (money going out). Maximize the first, minimize the second.