What is the difference between… · Personal finance
You asked
What is the difference between APR and APY?
APR (Annual Percentage Rate) is what you PAY to borrow — it includes fees but ignores compounding. APY (Annual Percentage Yield) is what you EARN on savings — it includes compounding. For the same nominal rate, APY > APR because APY counts interest-on-interest. Loans and cards are quoted in APR (looks lower); savings in APY (looks higher).
The full answer
The one-sentence difference
Both annualize a rate, but APR ignores compounding and adds fees (the *borrowing* number), while APY includes compounding and ignores fees (the *saving* number).
Side-by-side comparison
| Property | APR | APY |
|---|---|---|
| Stands for | Annual Percentage Rate | Annual Percentage Yield |
| Side | Borrowing (loans, cards) | Saving (HYSA, CDs) |
| Compounding | Ignored (simple) | Included (effective) |
| Fees | Included (origination, points) | Not included |
| For same nominal rate | Lower | Higher |
| Legal basis (US) | Truth in Lending Act (1968) | Truth in Savings Act (1991) |
| Quoted by | Lenders | Banks on deposits |
Why APY is always ≥ APR for the same nominal rate
APR is a simple annualization: 24% APR = 2%/month, stated as 24%. APY compounds that same 2%/month:
APR view: 24%
APY view: (1 + 0.24/12)^12 − 1 = 26.8%Same underlying 2% monthly rate; APY is higher because it counts the interest that accrues on prior interest. The gap grows with the rate and with compounding frequency.
The asymmetry is deliberate (and worth knowing)
Institutions quote whichever framing flatters them: - Credit cards quote APR — ignoring compounding makes the headline *lower* than the true effective cost you pay. - Savings quote APY — including compounding makes the headline *higher* than the nominal rate you'd otherwise see.
Same math, opposite spin. To compare honestly, convert both to the same basis (usually the effective/compounded rate).
A worked contrast
- Borrowing: a card at 24% APR actually costs ~26.8% effective once monthly compounding is counted.
- Saving: an account at 5% nominal pays ~5.13% APY once daily compounding is counted.
In both cases the compounded (APY/effective) number is the one that reflects reality; APR simply omits it on the borrowing side.
The consumer-protection angle
US law forces standardized disclosure on both sides — APR via the Truth in Lending Act so borrowers can compare loan costs, APY via the Truth in Savings Act so savers can compare deposit returns. The two acts exist precisely because the two numbers are easy to confuse.
This explains how the two rates are calculated — it is not financial advice.
Cross-reference: see /pages/what-is/apr + /pages/what-is/apy + /pages/what-is/compound-interest.
At a glance
| Case | Answer | Note |
|---|---|---|
| APR | borrowing number — fees in, compounding out | — |
| APY | saving number — compounding in, fees out | — |
| Same nominal rate | APY ≥ APR (always) | — |
| 24% APR → APY (monthly) | 26.8% | — |
| 5% nominal → APY (daily) | 5.13% | — |
What changes the answer
- Compounding. The core difference: APR omits it, APY includes it — so APY > APR for the same nominal rate
- Fees. APR folds in required fees (origination, points); APY does not
- Which side. Lenders quote APR (looks lower); banks quote deposit APY (looks higher) — deliberate framing
- Frequency. More frequent compounding widens the APR-to-APY gap
Common questions
Which is bigger, APR or APY?
For the same nominal rate, APY is always greater than or equal to APR, because APY counts compounding and APR does not. A 24% APR card has a ~26.8% effective (APY-equivalent) cost once monthly compounding is included. The only case they are equal is annual compounding with zero fees.
Why do credit cards use APR and savings accounts use APY?
Marketing framing. Ignoring compounding (APR) makes a card's headline rate look lower than its true effective cost, so lenders quote APR. Including compounding (APY) makes a savings rate look higher than the bare nominal rate, so banks quote APY. Same math, opposite incentive — which is why comparing on consistent units matters.
How do I convert APR to APY?
Use APY = (1 + APR/n)^n − 1, where n is compounding periods per year. A 24% APR compounded monthly converts to (1 + 0.24/12)^12 − 1 = 26.8% APY. To go the other way (APY to nominal), reverse the formula. This lets you compare a loan quoted in APR against a product quoted in APY on the same effective basis.
Does APR include fees and APY does not?
Yes — that is a second difference beyond compounding. APR folds in required finance charges like origination fees and mortgage points, which is why a loan's APR exceeds its bare interest rate. APY reflects only compounding on the deposit and excludes account fees (so watch maintenance fees separately, as they can erode a small balance's real yield).
Sources
We cite primary research, expert practice, and authoritative reference. Higher-tier sources weighted heavier. See methodology.
- T1US CFPB — APR vs APY consumer explainer — Authoritative side-by-side of APR (lending) vs APY (savings)
- T1US Federal Reserve — Regulation Z + Regulation DD — Legal basis for APR (Reg Z) + APY (Reg DD) disclosure
- T1US FDIC — deposit account yield resources — Government education on APY + compounding
- T1Aswath Damodaran, NYU Stern — Nominal vs effective rate mechanics
Cite this page
de Vries, P. (2026). What is the difference between APR and APY?. AskedWell. Retrieved 2026-10-12, from https://askedwell.com/pages/what-is-the-difference-between/apr-vs-apy
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