Finance
APR vs APY
APR and APY are both annual percentage rates, but they are not the same number — the difference is compounding, and it decides how much interest you really pay or earn.
| Aspect | APR | APY |
|---|---|---|
| Full name | Annual Percentage Rate | Annual Percentage Yield |
| Includes compounding? | No — the simple yearly rate | Yes — reflects interest on interest |
| Usually quoted for | Loans and credit cards (what you pay) | Savings and deposits (what you earn) |
| Which looks higher | Lower for the same nominal rate | Higher, because compounding is added |
| Why it matters | May understate the true cost of borrowing | Shows the true return with compounding |
When to use apr
You will see APR on borrowing — credit cards, mortgages, personal loans — where it states the yearly interest rate (and, by regulation in many places, certain fees) but not the effect of compounding.
When to use apy
You will see APY (or AER) on savings and deposits, where it shows the real annual return once compounding is included — the honest number for comparing accounts.
Frequently asked questions
- Is APY always higher than APR?
- For the same nominal rate, APY is equal to or higher than APR, because APY adds the effect of compounding. They are equal only if interest compounds exactly once a year; more frequent compounding widens the gap.
- Which should I compare when choosing a savings account?
- Compare APY (or AER), since it reflects compounding and lets you compare accounts on equal terms. Comparing a nominal rate against an APY is not apples-to-apples.
- Does APR include fees?
- It depends on the product and jurisdiction. In some regulated cases APR bundles certain fees into the rate to show a truer cost of borrowing, but it still excludes the effect of compounding. Always read what a specific APR includes. This is general education, not financial advice.