On this page
The one-line distinction
Both are annual percentage rates, but they sit on opposite sides of your money:
- APR (Annual Percentage Rate) is what you pay to borrow — on a credit card, mortgage, or car loan.
- APY (Annual Percentage Yield) is what you earn when you save or invest — on a savings account or CD.
The technical difference is compounding. APY bakes in the effect of interest earning interest over the year; APR, as it's typically quoted, does not (Consumer Financial Protection Bureau — what is APR?).
Why APR can understate what you actually pay
On a credit card, the quoted APR is a simple annual rate, but interest is usually charged on your balance daily. The card divides the APR by 365 to get a daily rate, then compounds it. So a card advertised at 24% APR has an effective annual cost slightly higher than 24% once daily compounding is included.
APR also matters because, for loans like mortgages, it's legally required to fold in certain fees (points, some closing costs) — which is why a mortgage's APR is often a bit higher than its quoted interest rate, and why APR is the fairer number for comparing loan offers (CFPB — APR vs. interest rate).
Why APY is the honest number for savings
When you're earning interest, compounding works for you, so the number that tells the truth is APY. A high-yield savings account quoting 4.00% APY will actually pay slightly more than one quoting "4.00% interest" compounded once a year, because the APY already reflects monthly or daily compounding (CFPB — what is APY / how is interest calculated). Banks are required to disclose APY precisely so you can compare accounts on equal footing (FDIC — Truth in Savings).
How to use this in practice
- Borrowing: compare offers by APR, and remember your effective cost is a touch higher than the sticker because of compounding. Lower is better.
- Saving: compare accounts by APY, not the headline "interest rate." Higher is better.
- Same rate, different label: a 5% APR and a 5% APY are not the same — the APY represents more money once compounding is counted.
The mental shortcut: APR is the price of money you owe; APY is the reward for money you keep. Same math, opposite direction — and APY always tells you the compounded truth.
