APR vs APY: What the Letters Actually Mean

APR and APY look almost identical. The letters are one apart, the numbers are usually close, and many people use the words interchangeably. They mean different things, and that difference can quietly cost you money on the borrowing side and quietly understate what you earn on the saving side.

This is a plain-English explainer. For a feel for how rates affect a budget over time, our budget calculator can help. For more vocabulary, see interest rate and compound interest, and the Learn hub for related topics.

The one-sentence definitions

• APR (Annual Percentage Rate) — the yearly cost of borrowing, including most fees, without the effect of compounding.
• APY (Annual Percentage Yield) — the yearly result on savings, with the effect of compounding included.

That is the whole conceptual difference. The Consumer Financial Protection Bureau (CFPB) at consumerfinance.gov and the Federal Deposit Insurance Corporation (FDIC) at fdic.gov both lean on this distinction in consumer guides.

Why the law uses two different numbers

Federal law makes lenders and banks show different numbers for borrowing and saving on purpose:

• The Truth in Lending Act (TILA), enforced by the CFPB, requires lenders to disclose APR so you can compare loans apples to apples.
• The Truth in Savings Act (TISA), also enforced by the CFPB, requires banks to advertise APY so you can compare savings products apples to apples.

This is why your credit card statement shows "Purchase APR: 22.99%" and your high-yield savings account shows "APY: 4.50%."

Compounding, in two paragraphs

Compounding is when interest earns interest. If you put $1,000 in a savings account at 5% interest and the bank pays the interest once a year, after one year you have $1,050. Easy.

If the same account pays the interest monthly, after each month you earn 5% / 12 of the previous balance. The next month, the interest is calculated on the slightly larger balance. After a year you have about $1,051.16. The extra $1.16 came from compounding. The same 5% becomes a slightly higher actual yield because the math compounds more often.

That is the difference between APR (the simple rate) and APY (the rate that includes compounding).

A worked example on borrowing

A credit card has APR of 22% and compounds daily. The actual rate you pay on a balance carried for a full year is closer to ~24.5% (the APY equivalent). The CFPB requires the disclosure to show the APR — but the math under the hood is APY-flavored. This is one reason carrying a credit card balance is so expensive.

For installment loans (mortgages, auto loans, student loans), the APR is meant to include most up-front fees, not just the interest rate. That makes APR a better comparison number than the rate alone — but it still does not include every cost. The CFPB's loan estimate explainer walks through what is and is not in the APR.

A worked example on saving

A high-yield savings account quotes:

• APR: 4.91%
• APY: 5.02%

That is the same account. The 4.91% is the simple rate. The 5.02% includes the daily compounding the bank actually does. By law, banks must show APY for savings products so you can compare them across banks that compound at different rates.

If you are comparing a 5.00% APR account that compounds quarterly to a 4.95% APY account that compounds daily, the daily compounder may actually pay more.

How banks calculate APY

The math is set in the Truth in Savings Act:

• Take the rate.
• Apply the bank's compounding period.
• Compute the actual yearly result.

For example, a 5% rate compounded:

• Yearly: APY ~5.00%.
• Monthly: APY ~5.12%.
• Daily: APY ~5.13%.

The CFPB's Truth in Savings rules at consumerfinance.gov lay out the formula and require it to be applied consistently.

When APR and APY are the same

If a product compounds annually, APR and APY are the same number. This is uncommon today — most credit cards compound daily, most savings accounts compound daily or monthly, most loans use monthly compounding for the underlying interest. Always check the disclosure.

Common places people get tripped up

A few traps the FDIC and CFPB consumer guides flag:

• A "teaser" or promotional APY — sometimes lasts only a few months. Read the fine print on when it expires.
• A credit card "introductory APR" — usually 0% for a limited window, then jumps to a normal APR. The CFPB warns about this on its credit card explainer page.
• A loan APR that excludes mandatory insurance or service charges — APR is meant to include most fees, but some are excluded depending on loan type.
• Comparing a savings APR to a loan APY — apples to oranges. Compare APR to APR (loans) and APY to APY (savings).

Why APR matters more on the borrowing side

For loans, the law uses APR because it forces lenders to fold most up-front fees into a single comparison number. Two loans can have the same interest rate but very different APRs because of fees. The CFPB's mortgage loan estimate explainer at consumerfinance.gov shows this side by side.

When shopping for any loan — mortgage, auto, personal, student — line up the APRs first.

Why APY matters more on the saving side

For savings, the law uses APY because it forces banks to show the real yearly outcome, including their compounding schedule. Two banks can advertise the same "5% rate" but pay different amounts depending on how often they compound. APY makes the comparison fair.

The MyMoney.gov hub at mymoney.gov reinforces the same idea — APY for savings, APR for borrowing.

A small cheat sheet

Quick mental shortcut:

• Loan? Look at APR. Higher = worse.
• Savings? Look at APY. Higher = better.
• Both for the same product? The wider the gap, the more the compounding is doing.

A note on advice

This is general information, not advice. APR and APY are tools for comparing products on the same terms — they are not the only thing that matters. Other terms (loan length, fees, withdrawal limits, FDIC insurance) can swing the actual cost or benefit. A non-profit credit counselor (the CFPB lists approved ones) can help walk through your real numbers.

Numbers and rules in this article change every year — always check the latest from the SEC's investor.gov, the IRS, and your bank or broker.