APR and APY look like alphabet soup, but confusing them costs real money. One tells you what borrowing costs; the other tells you what saving earns. Here is how to never mix them up again.

APR: the price of borrowing

APR (Annual Percentage Rate) is the yearly cost of borrowing, expressed as a percentage. It includes not just the interest rate but also most lender fees, spread across the loan term, so it is the number you use to compare loans apples to apples.

A $300,000 mortgage at 6.5% interest with $6,000 in fees might show an APR of 6.72%. A competing offer at 6.625% interest with $1,500 in fees might show an APR of 6.70%, actually cheaper despite the higher rate. Always compare APR, not the headline rate, when shopping for mortgages, auto loans, or personal loans.

One catch: APR does not account for compounding within the year on most loans, and credit card APRs are notoriously misleading because they assume you carry the balance all year without paying down principal.

APY: the reward for saving

APY (Annual Percentage Yield) is what your savings earn in a year including compound interest. It answers: "if I leave $10,000 here for a year, how much will I actually have?"

A savings account advertising 4.00% interest compounded monthly has an APY of about 4.07%. The APY is always equal to or higher than the nominal rate, because compounding adds extra growth. When comparing savings accounts, CDs, or money market accounts, compare APY, it is the only number that reflects what you actually earn.

Side-by-side

| | APR | APY | |---|---|---| | Applies to | Borrowing (loans, cards) | Saving (accounts, CDs) | | Includes fees | Usually yes | N/A | | Includes compounding | Usually no | Yes, always | | Higher is... | Worse for you | Better for you | | Use it to | Compare loan costs | Compare savings earnings |

Memory trick: APR = A Price to Repay. APY = A Profit to You.

How the confusion costs you

  • Borrowers who compare interest rates instead of APRs pick loans with low rates but high fees, paying thousands more.
  • Savers who compare "interest rates" instead of APYs leave money on the table, a 4.5% APY account beats a 4.4% rate compounded annually by real dollars over time.
  • Credit cards quote APR (often 20%+), but if you carry a balance, the effective rate with daily compounding is slightly higher than the stated APR. Pay in full and the APR is irrelevant.

The bottom line

Borrowing? Look at APR, lower wins. Saving? Look at APY, higher wins. Never compare one against the other. Run loan costs through our loan payment calculator or mortgage calculator, and project savings growth with our compound interest calculator.

Estimates for planning only, not financial advice.