APY vs. APR: The Two Percentages That Decide What You Earn and Owe

Two similar-sounding percentages show up everywhere in personal finance, and they work in opposite directions. APY (annual percentage yield) applies to money you deposit; APR (annual percentage rate) applies to money you borrow.

What is APY?

Federal Reserve Regulation DD defines annual percentage yield as a percentage rate reflecting the total amount of interest paid on an account, based on the interest rate and the frequency of compounding over a 365-day period. The key word is compounding: two savings accounts can advertise the same interest rate, but the one that compounds more often pays more. APY captures that difference, so it is the number to compare when choosing where cash sits.

What is APR?

APR is the cost of borrowing expressed as a yearly rate. As the Consumer Financial Protection Bureau explains for mortgages, the APR includes the interest rate plus certain fees and costs, so it is typically higher than the loan's stated interest rate. When comparing loans or credit cards, APR is the more complete price tag.

Why does the difference matter?

Banks advertise the most flattering number in each direction: a high APY on savings, a low interest rate on loans. Comparing APY to APY when saving, and APR to APR when borrowing, keeps the comparison honest. A savings account compounding daily beats one compounding annually at the same rate, and a loan with a low rate but heavy fees can cost more than a slightly higher-rate loan with none.

Frequently asked questions

Is a higher APY always better? For the yield itself, yes, but also check withdrawal limits, minimum balances, and whether the account is at an FDIC-insured bank.

Do credit cards have an APY? No. Credit cards quote an APR. Because card interest compounds, the true annual cost of carrying a balance is actually a bit higher than the stated APR.

Sources and further reading: Federal Reserve, Regulation DD Section 1030.2 Definitions (https://www.federalreserve.gov/frrs/regulations/section-10302-definitions.htm); CFPB, "What is the difference between a mortgage interest rate and an APR?" (https://www.consumerfinance.gov/ask-cfpb/what-is-the-difference-between-a-mortgage-interest-rate-and-an-apr-en-135/).