APR vs APY: What the Difference Really Means

Banks use two three-letter terms that sound alike, APR and APY. The one-letter difference matters. One tells you what you will pay. The other tells you what you will earn. Using the wrong one to compare products can make a worse deal look better. This guide explains both, with examples you can check.

What is APR?

APR stands for annual percentage rate. It is the cost of borrowing for one year, shown as a percentage. In the United States, the Truth in Lending rules require lenders to show it so you can compare loans.

For a mortgage, the APR is more than the interest rate. The Consumer Financial Protection Bureau explains that an APR reflects the mortgage interest rate plus other charges, because there are many costs to taking out a mortgage. That is why a loan with a 7.4% rate can have an APR above 7.4%.

Example. Take a $300,000 30-year loan at a 7.4% rate. The payment is about $2,077 a month. Suppose the lender charges $5,000 in points and fees up front. You effectively receive $295,000 but pay the same $2,077. The rate that matches those cash flows is about 7.57%. That is the APR. The 0.17 points of difference is the cost of the fees, spread over the loan.

The APR lets you compare two offers on the same footing. A lower rate with high fees may have a higher APR than a slightly higher rate with low fees.

What is APY?

APY stands for annual percentage yield. It is the total interest a deposit account pays in a year, shown as a percentage, and it takes compounding into account. Compounding means the interest earned is added to your balance, and then that interest earns interest too.

The federal rules for deposit accounts, known as Regulation DD, require banks to state the APY and explain how it is worked out. The formula is APY = 100 × [(1 + interest ÷ principal) raised to the power of (365 ÷ days in the term) − 1]. That looks hard, but you can read it as "the interest actually earned in one year, as a percent of your money."

How compounding changes the number

Take a stated rate of 5%.

The more often interest is added, the higher the APY. The difference between monthly and daily is tiny. The big difference is between a high rate and a low rate, not between compounding schedules.

Why this matters when you save

Look at real savings rates. The FDIC's national average for savings accounts was 0.37% in September 2026, and for 12-month CDs it was 1.73%. Here is what $10,000 earns in one year:

• At 0.37% APY: about $37.
• At 1.73% APY (a 12-month CD at the national average): about $173.
• At 4.5% APY (an account that pays more than average): about $450.

The labels matter less than the number, but one trap remains. For deposit accounts, the CFPB notes the plain interest rate may be called the "annual percentage rate" on some statements, and that number does not include compounding. When comparing savings accounts, look at the APY.

Why this matters when you borrow

Lenders also compound, and on credit cards it works against you. The Federal Reserve reported an average credit card interest rate of 22.15% for accounts that were assessed interest in the second quarter of 2026. The CFPB explains that card issuers generally use a daily rate, which is the APR divided by 365 (some use 360), applied to your average daily balance, and that adding the prior day's interest to the next day's balance makes interest compound daily.

Example. You carry a $1,000 balance at 22.15% APR and make no payments for a year. With interest added every month, the balance grows to about $1,245, which is 24.5% more. With interest added every day, it grows to about $1,248, which is 24.8% more. The "real" yearly cost of the card is above its APR.

This is why a card is such an expensive way to borrow, and why paying it down quickly matters. Interest on interest builds fast.

A quick comparison

Where to find the number

• On a mortgage: the Loan Estimate and the Closing Disclosure both show the APR in a "comparisons" section. Put the Loan Estimates from several lenders side by side.
• On a credit card: look for the pricing table at the front of your cardholder terms, which lists the purchase APR, cash advance APR and penalty APR.
• On a savings account or CD: the account disclosure and the bank's rate page state the APY. Compare accounts by that number.

Five rules to remember

1. Compare loans by APR, and savings by APY.
2. On a loan, ask what fees are included in the APR and which are not.
3. On a savings account, check for minimum balances, fees and whether the rate is promotional.
4. A rate that compounds more often is slightly better for savers and slightly worse for borrowers.
5. The size of the rate matters far more than how often it compounds.

To see what compounding does to your own savings, try the compound interest calculator. Change the rate and the compounding setting and watch the balance.

Frequently asked questions

Is APR or APY higher?

For the same stated rate, APY is higher than the nominal rate whenever interest compounds more than once a year. They are different measures, though, so you should not compare an APR with an APY.

Which should I look at when choosing a savings account?

The APY. Federal rules require banks to state it, and it is the number that shows what you actually earn in a year, including compounding.

Which should I look at when choosing a loan?

The APR, and the loan estimate or the loan terms. The APR includes certain fees on loans such as mortgages, so it is better than the interest rate for comparing offers.

Can an APY be lower than the interest rate?

For ordinary accounts that compound, no. For some certificates that do not compound and pay interest at least once a year, the APY and the stated rate can be equal.

Why does my credit card say APR but charge more?

Because interest compounds daily on most cards. The APR is the yearly rate before compounding, so the amount you really pay over a year is higher if you carry a balance.

The bottom line

APR is the price of borrowing and APY is the reward for saving. Use the right one for the right job, look at the size of the rate first, and remember that compounding helps you when you save and hurts you when you owe.

Sources

• What is the difference between a mortgage interest rate and an APR?, Consumer Financial Protection Bureau
• Appendix A to Part 1030: Annual Percentage Yield Calculation (Regulation DD), Consumer Financial Protection Bureau
• How does my credit card company calculate the amount of interest I owe?, Consumer Financial Protection Bureau
• Consumer Credit (G.19), Q2 2026, Federal Reserve Board
• National Rates and Rate Caps (September 2026), Federal Deposit Insurance Corporation

Examples are worked out by script from the formulas above. Rates change every month. Last reviewed October 12, 2026.