What is the difference between APY and APR?
APY is what you earn on savings, compounding included. APR is what you pay to borrow, usually without compounding.
New to this?
Both are yearly percentages. APY, annual percentage yield, shows what a bank pays you on savings in a year, including interest earned on interest. APR, annual percentage rate, shows what a lender charges you to borrow for a year, sometimes with fees included. You see APY on savings and CDs, and APR on cards and loans.
Read first
Myth
APR and APY are the same number with different names.
Truth
They measure different things. A savings rate of 4.00% compounded daily is an APY of 4.08%. A card at 24% APR, compounded monthly on an unpaid balance, really costs about 26.82% a year.
Worth memorizing
- 1
APY is for savings and includes compounding.
It is the interest you would earn on a balance in one year, so $5,000 at 4% APY earns $200.
- 2
APR is for borrowing and excludes compounding.
A card's monthly rate is its APR ÷ 12. At 24% APR, that is 2% a month on your balance.
- 3
Compare like with like.
Use APY to compare savings and APR to compare loans. Mixing them makes offers look better than they are.
When you save, I'd compare APYs. When you borrow, compare APRs. Never compare one with the other. And if a card balance is costing 20% or more, paying it down earns you more than any savings account will.
Do this today
Log in to your savings account and write down its APY, then find the purchase APR on your credit card statement. If you carry a card balance, divide the APR by 12 to see the monthly rate you are paying.
Practice
1 of 3
Which number should you use to compare two savings accounts?
APY is the standard for deposits. It includes compounding and every bank calculates it the same way.
2 of 3
A card has an 18% APR. How much interest would one month add to a $1,000 balance?
18% ÷ 12 = 1.5% a month. $1,000 × 1.5% = $15.
3 of 3
Why can a loan's APR be higher than its interest rate?
The CFPB explains that a loan's APR is the interest rate plus additional lender fees, like origination charges.
Tips
Shop savings by APY
Banks must show the APY on savings accounts and CDs, calculated the same way. It already includes compounding, so the higher APY earns more.
Shop loans by APR
For loans, the APR includes the interest rate plus some fees, like origination charges. A low interest rate with high fees can have the higher APR.
Check every APR on a card
Most cards have several APRs: one for purchases, one for cash advances, a penalty APR and sometimes a promotional rate. Read the table on the application.
Pay card balances in full
If you pay the statement balance by the due date each month, most cards charge no interest on purchases, so the APR never applies.
A worked example: a savings APY next to a card APR
Dana, a pharmacy tech, has $5,000 in savings at 4% APY and a $2,000 credit card balance at 24% APR. She compares what each one does in money.
- Savings: $5,000 × 4% = $200 a year. The APY already includes compounding, so that is what she earns if the rate holds.
- Card: 24% ÷ 12 = 2% a month. $2,000 × 2% = $40 of interest in one month, so she owes $2,040 before paying.
- If the balance stayed at $2,000 all year, the card would cost $40 × 12 = $480, while savings earns $200.
- Savings balance$5,000
- APY4%
- Interest for a year+$200
- Savings after a year=$5,200
- Card balance$2,000
- APR24% APR
- Interest this month+$40
- Owed next month=$2,040
Try your numbers
Reference
What different card APRs cost on a $2,000 balance in one month
| APR | Monthly rate | Interest on $2,000 in one month |
|---|---|---|
| 10% | 0.83% | $16.67 |
| 15% | 1.25% | $25.00 |
| 20% | 1.67% | $33.33 |
| 24% | 2% | $40.00 |
| 29% | 2.42% | $48.33 |
Common mistakes
Comparing an APY with an APR
A 4% APY savings account doesn't offset a 24% APR card. The card costs about 6 times what the savings earns on the same dollars.
Shopping loans by interest rate alone
A loan with a low rate and a big origination fee can cost more than one with a slightly higher rate and no fee. The APR shows the fees.
Missing the promotional end date
A 0% intro APR on a card or a high intro APY on savings usually lasts a set number of months. Write down the date it ends and the rate that follows.
Going deeper
APY (annual percentage yield) tells you what a savings account earns in a year, including compounding. APR (annual percentage rate) tells you the yearly cost of borrowing, and it usually leaves compounding out, so the cost of a card balance you carry is a bit higher than its APR.
APY measures what you earn
Federal Truth in Savings rules define APY as the total interest paid on an account over 365 days, based on the rate and how often interest compounds. Every bank calculates it the same way, so you can compare accounts fairly.
APR measures what you pay
For a loan, the APR is the interest rate plus certain fees charged when the loan is made. For a credit card, the APR is simply the yearly interest rate, and most cards have more than one.
Compounding makes the gap
The more often interest compounds, the more APY rises above the plain rate. A 4.00% rate compounded daily gives a 4.08% APY. On debt, the same effect makes an unpaid balance cost more than the APR.
Neither one is a promise for variable rates
Savings APYs and most credit card APRs can change. A savings APY can drop after you open the account, and a variable card APR moves with a benchmark rate.
What APY tells you
APY answers one question: if I leave this money here for a year, how much interest will I have? It bakes in compounding, which is interest earning interest. A bank that pays a 4.00% rate and adds interest daily ends up paying a 4.08% APY, because each day's interest starts earning too.
Because the rules for calculating APY are set by federal regulation, it is the fair way to compare savings accounts, money market accounts and certificates of deposit. Your monthly savings statement also shows the APY you actually earned for that period.
What APR tells you
APR is the yearly price of borrowing. On a car loan, personal loan or mortgage, it includes the interest rate plus some up-front fees, so two loans with the same rate can have different APRs. That makes APR the better number to compare lenders.
On a credit card, the APR is the interest rate itself, stated per year. The card divides it into a daily or monthly rate and charges that on your balance. At 24% APR, a monthly rate of 2% on a $2,000 balance is $40 of interest for the month.
Why the numbers differ
APR is a simple yearly rate. It doesn't show what happens when unpaid interest is added to your balance and starts collecting interest too. If you carried $2,000 on a 24% card for a full year without paying, monthly compounding would grow it to about $2,536, which is 26.82% in one year.
APY is the opposite. It already includes compounding, so it is the honest number for savings. Federal rules require banks to quote savings as APY and lenders to quote borrowing as APR, so you will usually see each one in its own place.
Where you will see each one
APY appears on savings accounts, high-yield savings, money market accounts, CDs and some checking accounts that pay interest. APR appears on credit cards, car loans, student loans, personal loans, mortgages and buy now, pay later plans that charge interest.
Credit unions often call a savings account a "share account" and still show an APY. Some loans also show an interest rate next to the APR. When both appear, use the APR to compare total cost and the interest rate to understand the monthly payment.
Questions people ask
Is a higher APY or a lower APY better?
For savings, a higher APY is better because you earn more. Make sure the account is insured, has no monthly fee that eats the interest, and check how long any promotional APY lasts.
Is a 5% APY good?
It depends on current rates, which move with the economy. Compare it with the APY at other insured banks and credit unions this week, and check whether it is an intro rate or needs a high minimum balance.
Does APR include compounding?
Not on its own. APR is a simple yearly rate. If interest is added to an unpaid balance each month, the effective yearly cost ends up above the APR. That is why carrying a card balance costs more than the APR suggests.
What is a daily periodic rate?
It is the APR divided by 365 (some cards use 360). Many cards charge this rate on your balance each day. A 24% APR works out to about 0.066% a day.
Printable worksheet with answer key, free for classrooms. Lesson plan for this unit.
Sources
- CFPB: Regulation DD § 1030.2, definitions of annual percentage yield and interest rate
- CFPB: Regulation DD appendix A, annual percentage yield calculation
- CFPB: What is the difference between a loan interest rate and the APR?
- CFPB: What is a credit card interest rate? What does APR mean?
- CFPB: What is a daily periodic rate on a credit card?
Updated October 4, 2026. General education, not personalized financial, tax or legal advice. Figures are examples. Check current rates and limits before you act.
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