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WalletPrep worksheet · Money basics

What is the difference between APY and APR?

Name ____________________ Date __________

Key ideas

  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.

Vocabulary

APY
Annual percentage yield: the yearly return on savings, including the effect of compounding. Use it to compare savings accounts.
Compound interest
Interest earned on both your original money and the interest it already earned, so growth speeds up over time.
APR
Annual percentage rate: the yearly cost of borrowing money, shown as a percentage. It is the number to compare on cards and loans.
Certificate of deposit
A bank deposit that pays a fixed rate for a set term, like 6 months or 5 years, with a penalty if you take the money out early.
High-yield savings account
A savings account that pays a much higher interest rate than a typical bank savings account, often offered by online banks.
Credit union
A not-for-profit financial cooperative owned by its members, offering checking, savings and loans much like a bank.

Work it out

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.

  1. Savings balance
  2. APY
  3. Interest for a year
  4. Savings after a year
  5. Card balance
  6. APR
  7. Interest this month
  8. Owed next month

Check yourself

  1. Which number should you use to compare two savings accounts?

    • A. APR
    • B. APY
    • C. The minimum payment
    • D. The credit limit

  2. A card has an 18% APR. How much interest would one month add to a $1,000 balance?

    • A. $18
    • B. $180
    • C. $1.80
    • D. $15

  3. Why can a loan's APR be higher than its interest rate?

    • A. The APR includes some fees charged to make the loan
    • B. The APR is always rounded up
    • C. The APR includes your credit score
    • D. The APR includes taxes

Your turn

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.

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Answer key

What is the difference between APY and APR?

Work it out

  1. Savings balance$5,000
  2. APY4%
  3. Interest for a year$200
  4. Savings after a year= $5,200
  5. Card balance$2,000
  6. APR24% APR
  7. Interest this month$40
  8. Owed next month= $2,040
  1. Savings: $5,000 × 4% = $200 a year. The APY already includes compounding, so that is what she earns if the rate holds.
  2. Card: 24% ÷ 12 = 2% a month. $2,000 × 2% = $40 of interest in one month, so she owes $2,040 before paying.
  3. If the balance stayed at $2,000 all year, the card would cost $40 × 12 = $480, while savings earns $200.

Check yourself

  1. B. APY APY is the standard for deposits. It includes compounding and every bank calculates it the same way.
  2. D. $15 18% ÷ 12 = 1.5% a month. $1,000 × 1.5% = $15.
  3. A. The APR includes some fees charged to make the loan The CFPB explains that a loan's APR is the interest rate plus additional lender fees, like origination charges.