APR vs APY: The Difference, Explained Simply
Finance · 5 min read · Last updated: June 2026The short answer: APR (annual percentage rate) ignores compounding, while APY (annual percentage yield) includes it. APR is the simple yearly rate before interest starts earning interest; APY is the real, effective yearly rate after compounding is baked in. For the same nominal rate, APY is always equal to or higher than APR — and the gap grows the more often interest compounds. You'll see APR on loans and credit cards, and APY on savings accounts and CDs. Want the numbers for your own balance? Run them through our Loan Calculator or Compound Interest Calculator.
What is APR?
APR is the annualized interest rate on borrowed money, expressed as a single yearly percentage. Under the federal Truth in Lending Act, US lenders must disclose APR so borrowers can compare offers on a level field (Consumer Financial Protection Bureau). For many loans — mortgages especially — APR also folds in certain lender fees and points, which is why a mortgage's APR is usually a bit higher than its quoted note rate. The key thing to remember: a stated APR does not reflect compounding that happens during the year.
What is APY?
APY is the effective annual rate after compounding. If a savings account pays 5% nominal interest compounded monthly, you don't simply earn 5% — each month's interest is added to the balance and starts earning interest itself. The result is an APY of about 5.12%. Banks are required to advertise the APY on deposit accounts under federal Truth in Savings rules, precisely because it tells you what you'll actually earn.
APR vs APY: side-by-side
| Feature | APR | APY |
|---|---|---|
| Full name | Annual Percentage Rate | Annual Percentage Yield |
| Compounding | Not included | Included |
| Typically shown on | Loans, credit cards, mortgages | Savings, CDs, money markets |
| May include fees? | Often yes (e.g. mortgage points) | No — interest only |
| Which is larger? | Lower (or equal) | Higher (or equal) |
| Best for | Comparing borrowing costs | Comparing what you'll earn |
How big is the difference, really?
The math behind APY is straightforward: APY = (1 + r ÷ n)n − 1, where r is the nominal rate and n is the number of compounding periods per year. Take a 20% nominal credit-card rate that compounds daily (n = 365). The effective APY works out to roughly 22.1% — more than two full percentage points higher than the advertised 20% APR. On a $5,000 balance carried for a year, that's about $105 of extra cost you wouldn't see by looking at APR alone.
Which one should you focus on?
When you're borrowing, compare APR to APR — it's the standardized number lenders must publish, and it lets you weigh two loans fairly. But remember the rate you actually pay on revolving debt like a credit card is closer to the APY, because card interest compounds daily. The average credit card APR in the US sat around 21–22% in early 2026 according to Federal Reserve consumer-credit data, so that compounding gap adds up fast.
When you're saving, compare APY to APY. Two accounts advertising "5% interest" can pay different amounts if one compounds daily and the other annually — the APY cuts through that and tells you the real return.
Put your own numbers in
Rates in the abstract are hard to feel. To see how APR shapes a loan payment, use the Loan Calculator. To watch compounding (the engine behind APY) build a balance over years, try the Compound Interest Calculator. And if you're carrying a card balance, the Credit Card Payoff Calculator shows how that daily-compounding APR translates into real dollars and months. For the deeper mechanics, our guide on how compound interest works walks through the snowball step by step.
Frequently asked questions
Is APR or APY higher?
For the same nominal rate, APY is always equal to or higher than APR, because APY accounts for compounding within the year. They're equal only when interest compounds exactly once a year.
Why do credit cards quote APR instead of APY?
Federal disclosure rules require lenders to show the APR so borrowing costs can be compared on a common basis. Because most cards compound daily, the effective rate you actually pay is closer to the (higher) APY.
Does APR include fees?
For many loans, APR includes certain lender fees and points on top of the interest rate, which is why a mortgage APR usually exceeds its note rate. APY reflects only interest and compounding, not fees.
This article is for general education only and is not financial advice. Rates change frequently; verify current figures with the lender or institution.