APR vs. APY: What the Two Rates Actually Tell You

In the spring of 2023, the Federal Reserve had pushed the federal funds rate to its highest level in more than two decades, and suddenly everyone was comparing savings accounts again.¹ A bank might advertise a 4.75% "interest rate" on a high-yield savings account; a competing ad quoted 4.75% APY. Were those the same thing? At the same moment, anyone carrying a credit card balance was staring at a 24% or 29% APR on their statement.² Two acronyms, similar-sounding numbers, completely different meanings. Getting this wrong costs real money.

Let's start with what each one actually measures.

The simple split: one is a cost, one is a return

Annual Percentage Rate, or APR, is the price you pay to borrow money. It shows up on credit cards, car loans, mortgages, and personal loans. The lender quotes you a rate per year, and that rate tells you how much interest you owe on the principal you borrowed.²

Annual Percentage Yield, or APY, is the return you receive for depositing money. It shows up on savings accounts, money market accounts, and certificates of deposit. The bank quotes you a rate per year, and that rate tells you how much your balance will grow.³

So far they sound like mirror images. The critical difference is what each number does with compounding.

Why compounding changes everything

Compounding is interest earning interest. When interest is added to your balance (or your debt), the next round of interest gets calculated on a larger number. The more frequently that happens, the bigger the gap between a simple annual rate and what you actually earn or owe over a full year.

APY is built to capture that gap. A savings account advertising 4.75% APY is telling you the actual dollar return per year as a percentage of your deposit, after compounding is already included.³ The federal regulation that governs savings disclosures, known as Regulation DD, requires banks to express deposit account rates as APY precisely because it gives you the real, compounding-inclusive number.⁴ You can compare one 4.75% APY account directly against another and trust the comparison is apples to apples.

APR does not work that way. As lenders typically quote it, APR is a simple annual rate. The compounding happens underneath it, in the billing cycle, and the quoted number does not reflect it.⁵ That creates a systematic gap between the APR a credit card advertises and the true annual cost you carry.

The worked example: what 24% APR actually costs you

Take a credit card with a 24% APR. That sounds like 2% per month, so over twelve months you might expect to pay 24 cents on every dollar you carry, full stop.

Here is what actually happens. Credit card issuers typically compound interest daily.² To do that, they take your APR and divide it by 365 to get a daily periodic rate: 24% divided by 365 equals about 0.0658% per day. That tiny daily rate compounds 365 times across the year. The resulting effective annual rate works out to approximately 27.1%. You borrowed thinking the cost was 24 cents on the dollar; the true cost was closer to 27 cents.

The gap grows with higher rates. A 29% APR card, which is close to the national average for accounts carrying a balance, carries an effective annual cost of roughly 33.6%. The compounding that APY captures in your favor when you save works against you when you borrow, and at credit-card rates the effect is not trivial.

Now run the same math from the savings side. A high-yield savings account offering 4.75% APY with monthly compounding already includes the compounding in that number. If the underlying interest rate is 4.64%, that compounds monthly to arrive at exactly 4.75% APY. Both numbers appear in the same ad. If you only look at the headline 4.64% and compare it to another account's 4.75% APY, you are comparing a pre-compounding rate to a post-compounding rate, which is not a fair fight.

Where each term appears in the real world

The two rates live in distinct legal worlds, and understanding those rules helps you read any financial product clearly.

For borrowing, Regulation Z (the Truth in Lending Act's implementing rule) requires lenders to disclose APR on virtually all consumer loans.⁵ On a mortgage, the APR is especially useful because lenders must fold in certain fees, including origination points and some closing costs, on top of the interest rate.⁶ That is why a mortgage with a 6.875% interest rate might carry a 7.12% APR. The APR is the fair comparison number because it captures more of what the loan actually costs over time.

For saving, Regulation DD requires APY disclosure precisely because it is the full-compounding number.⁴ When you see a high-yield savings account quote an APY, that is not a marketing choice: it is a legal requirement, designed so that consumers can compare accounts without doing the compounding math themselves.

The practical read: when you are borrowing, compare APRs (lower is better, and ask about fees). When you are saving, compare APYs (higher is better, and the compounding is already in the number). Never compare a loan's APR against a savings account's APY as if they describe the same thing.

The same number, completely different outcomes

Here is a confusion that trips people up. Suppose you find two products, both advertising "5%": a personal loan at 5% APR and a savings account at 5% APY. Are those equivalent? They are not, and they are not even directly comparable.

The loan at 5% APR has a true annual cost above 5%, because the lender will compound interest during the year and the APR does not capture that. The savings account at 5% APY has a true annual return of exactly 5%, because the APY already does include the compounding. The savings product is actually the more complete disclosure of the two.³

The directional rule worth internalizing: APY tells you more truth than APR does, because it bakes in compounding. When a lender quotes you an APR and you want to know the true annual cost, you need to do the compounding conversion yourself, or ask for the effective annual rate. When a bank quotes you APY, the honest number is already in front of you.

What this means for the comparisons that matter

Let's bring these principles to the decisions where they show up most.

On credit cards: do not assume the APR is the ceiling on what the card costs you. If you carry a balance and the card compounds daily (most do), the real annual cost is higher than the advertised rate.² The APR is still the right number for comparing card offers against each other, because both are understating the true cost in the same way. But if you want to know what you are truly paying, convert the APR to an effective annual rate by applying the compounding frequency.

On mortgages: always compare the APR, not just the interest rate, when shopping lenders.⁶ Two mortgages with the same interest rate but different fees will show different APRs, and the APR is where the fee difference surfaces.

On savings accounts: compare APYs and ignore any "interest rate" or "rate" figures that are not APYs. Banks are required to show you the APY, so use it.⁴

Overall, the distinction reduces to one idea: the institution quoting you an APY has already done the compounding math on your behalf. The institution quoting you an APR has not. Once you know that, the arithmetic follows naturally, and you stop comparing numbers that are not measuring the same thing.