APR and APY answer two different questions. APR — annual percentage rate — expresses what borrowing costs over a year, and depending on the product it can fold in certain fees along with interest. APY — annual percentage yield — expresses what a deposit earns over a year, with the effect of compounding built in. One prices money you owe; the other measures money you are paid. They are stated in the same units, which is exactly why they get confused, and why comparing an APR directly against an APY usually misleads.
By Logan Delaney · Updated July 17, 2026 · 9 min read
The practical rules follow from the definitions. When you borrow, compare loans and cards using APR, and read what the figure does and does not include for that product type. When you save, compare accounts using APY, never the underlying interest rate. And when a single percentage moves from one context to the other — a 5% APR versus a 5% APY — remember that compounding and fees can make those two numbers describe meaningfully different flows of dollars. The sections below define each term, show one borrowing example and one saving example with verified arithmetic, and point to where each number lives in real disclosures.
Key points
- APR describes the annualized cost of borrowing; APY describes the annualized earnings on a deposit including compounding.
- APR treatment varies by product: a mortgage APR reflects certain loan fees, while a credit card APR typically reflects the interest rate applied to balances, with many card fees charged separately.
- APY is always at least as large as the account’s nominal interest rate, because compounding pays interest on interest.
- A higher APY is better for a saver, while a lower APR is better for a borrower — the two numbers should never be compared against each other.
- All dollar figures in this article are illustrations built on stated assumptions, not quotes, forecasts, or guarantees.
APR vs. APY at a glance
| Question | APR | APY |
|---|---|---|
| What does it measure? | The annualized cost of borrowing money | The annualized earnings on deposited money |
| Typical products | Credit cards, mortgages, auto and personal loans | Savings accounts, money market deposit accounts, CDs |
| Compounding included? | Not in the stated figure; card interest often accrues on a daily balance, which raises the effective cost above the stated APR when balances carry | Yes — capturing compounding is the point of APY |
| Fees included? | Sometimes: mortgage APRs reflect certain closing costs; card APRs generally do not include annual or late fees | No — account fees reduce earnings separately and can outweigh interest |
| Where it appears | Loan estimates and credit card account disclosures required by federal truth-in-lending rules | Deposit account disclosures and advertising required by federal truth-in-savings rules |
| Which direction is better | Lower | Higher |
What APR is
The CFPB’s annual percentage rate explainer describes APR as a yearly expression of the cost of borrowing. The purpose is comparison shopping: by standardizing costs into one annualized percentage, disclosure rules let you line up two loan offers that differ in rate, fees, and structure. But the standardization works differently across products, and that detail matters. For a mortgage, the APR is designed to bundle the interest rate with certain fees such as points and origination charges, which is why a mortgage’s APR is usually a bit higher than its note rate. For a credit card, the APR is essentially the interest rate applied to carried balances, and a single card can have several — one for purchases, another for cash advances, a penalty APR that can apply after certain missed payments — while annual fees and late fees are charged outside the APR figure.
Card interest also accrues in a way the headline number understates. Issuers commonly divide the APR by 365 to get a daily periodic rate and apply it to the balance each day, so interest compounds when balances carry from month to month. A card that never carries a balance and has a grace period on purchases can, by contrast, cost $0 in interest at any APR — the APR only bites when balances persist.
What APY is
The CFPB’s annual percentage yield explainer defines APY as the total amount of interest a deposit account earns in a year, expressed as a percentage that includes the effect of compounding. Compounding is interest earning interest: each time the bank credits interest, the balance grows, and the next crediting period starts from that larger base. Because of that effect, an account’s APY is always at least as high as its nominal interest rate, and the gap widens as compounding happens more frequently.
A concrete illustration: a nominal rate of 3.93% compounded monthly produces an APY of about 4.00%, because (1 + 0.0393/12)^12 − 1 ≈ 4.0016%. That is why deposit accounts advertise APY and why APY, not the nominal rate, is the number to compare across savings accounts. To experiment with your own assumptions, the SEC’s compound interest calculator at Investor.gov lets you vary the rate, period, and compounding frequency and watch the outcome change — a useful way to internalize how much frequency and time matter.
A borrowing example: what 20% APR actually does
Assume a credit card with a 20% purchase APR, interest computed with a daily periodic rate, and a cardholder carrying an average daily balance of $2,000 across a 30-day billing cycle. These numbers are illustrative, and real card math varies with the issuer’s methods, payment timing, and fees.
The daily periodic rate is 20% ÷ 365 days, or about 0.0548% per day. Interest for the cycle is roughly $2,000 × (0.20 ÷ 365) × 30 = $32.88. Notice what the APR did not tell you directly: a 20% APR does not mean a flat $400 charge per year on a $2,000 balance. If the balance carries and interest compounds daily, the effective annualized cost of that borrowing runs higher than the stated rate — about 22.13%, from (1 + 0.20/365)^365 − 1 — and the actual dollars depend on how the balance rises and falls with spending and payments. The dependable lesson is directional: carried card balances are expensive, they cost more than the headline APR suggests, and the mechanics are worth understanding in full — our breakdown of the real cost of credit card debt works through where those dollars go.
A saving example: what 4.00% APY actually pays
Now the deposit side. Assume $5,000 sitting in a savings account with a 4.00% APY, with the balance and rate unchanged for a full year — an assumption worth stating explicitly, since savings APYs are typically variable and can move at the bank’s discretion.
Because APY already incorporates compounding, the one-year arithmetic is deliberately simple: $5,000 × 0.04 = $200 of gross interest before taxes. There is no need to know the account’s compounding frequency to make that estimate — that is the convenience APY exists to provide. The same tailwind that inflates a borrower’s costs works in the saver’s favor here, and it rewards consistency: a balance that grows by regular deposits earns on an ever-larger base, which is part of the case for putting your savings on autopilot rather than contributing when you remember to.
Why the two numbers are not interchangeable
Set a 5% APR loan next to a 5% APY savings account and the symmetry is an illusion, for three reasons. First, direction: one number is a cost and the other is earnings, so “better” points opposite ways. Second, compounding: APY has it baked in, while a stated APR does not — so at the same stated percentage, the effective annual flow on the borrowing side can exceed what the savings side pays. Third, fees: a mortgage APR absorbs certain fees, a card APR does not absorb most card fees, and an APY absorbs no fees at all — a monthly account fee quietly reduces real-world earnings below the advertised yield. Cross-product comparisons need dollars and full terms, not a glance at two percentages.
The confusion is not always innocent, either. Presenting a borrowing cost using a periodic or nominal rate where it looks small, or an account’s earnings using whichever figure looks large, are old marketing habits — and the reason federal disclosure rules standardize which number must be shown for each product.
Where to find each number in your disclosures
For credit cards, look for the account-opening table — the standardized grid that lists the purchase APR, cash advance APR, penalty APR and trigger, and fees. For mortgages and many consumer loans, the loan estimate and closing documents state both the interest rate and the APR; the gap between them is a quick signal of how much the included fees add. For deposit accounts, truth-in-savings disclosures and ads state the APY, along with the minimums required to earn it and whether the rate is variable. When any account’s terms change, the updated disclosure — not the marketing page — is the document of record, so file them where you can find them.
Common APR and APY mistakes
- Using the terms as synonyms. They measure different directions of cash flow and treat compounding differently.
- Assuming every APR includes every fee. Inclusion rules depend on the product; card fees in particular mostly sit outside the APR.
- Comparing a savings account by its nominal rate. Two accounts with the same nominal rate but different compounding frequencies pay different amounts; APY is the comparable figure.
- Multiplying APR by a balance and calling it the annual cost. Daily accrual, changing balances, grace periods, and payment timing all move the real number.
- Treating an APY illustration as a promise. Variable rates change; a projection is only as durable as its assumptions.
- Ignoring fees on the deposit side. An account fee is not in the APY and can consume a small balance’s interest entirely.
Frequently asked questions
Is APR or APY higher for the same underlying rate?
With compounding more frequent than annual, the effective yearly figure sits above the nominal rate — so a given nominal rate corresponds to a slightly higher APY. That is arithmetic, not a bonus: it is the same money counted with compounding included.
Why does my mortgage show two different percentages?
The lower one is the interest rate on the note; the higher one is the APR, which annualizes the rate plus certain fees and closing costs. The spread between them is useful when comparing lenders whose fee structures differ.
Does a 0% APR promotion mean free borrowing?
It means no interest on qualifying balances for a stated period — not the absence of fees, and not forever. Balance transfer fees, deferred-interest terms on some retail offers, and the rate that applies after the promotion ends all sit outside that 0% figure. The account disclosure spells out which structure you have.
Can I use APY to compare a CD with a savings account?
APY puts their yields on the same footing, but yield is only half the comparison. A CD’s APY is typically fixed for the term with penalties for early withdrawal, while a savings APY is variable with ready access. Match the account to when you need the money first; compare APYs second.
Do these examples tell me what I will earn or owe?
No. Every calculation here is a simplified illustration with stated assumptions — constant balances, unchanged rates, no fees. Your products’ disclosures, balances, and timing determine your actual dollars.
The final takeaway
Keep the two numbers in their lanes. APR is for borrowing: compare it within the same product type, learn what it includes for that product, and remember that carried balances compound into more than the headline suggests. APY is for saving: it is the compounding-inclusive yardstick that makes deposit accounts comparable at a glance, subject to fees and rate changes. When you can state what each percentage measures, includes, and assumes, you can read any disclosure — and the marketing built around it — with the right kind of skepticism.
Editorial note: This article provides general educational information, not individualized financial, investment, tax, or legal advice. Financial decisions depend on your circumstances, account terms, and applicable rules.
Logan Delaney is the staff byline for Cactos New Hub guides on personal finance, smart shopping, personal style, and everyday decisions. Articles under this byline are reviewed for clarity, usefulness, and internal consistency before publication.
