APR vs. APY: What's the Difference and Why It Matters

APR and APY look almost the same, but they answer different questions. Knowing which one you're looking at helps you compare savings accounts, loans and credit cards fairly.

The short version

• APR (annual percentage rate) is the yearly rate a lender states for borrowing. It doesn't count interest that compounds during the year. For many loans it also folds in certain fees, which makes it a better comparison than the interest rate alone.
• APY (annual percentage yield) is the effective yearly rate after compounding. It's what savings accounts usually advertise.

Rule of thumb: when you're earning interest, a higher APY is better. When you're paying interest, a lower APR is better.

The formula

Here r is the stated annual rate as a decimal and n is how many times per year interest is compounded. The more often it compounds, the higher the APY for the same stated rate:

On $10,000 for one year, monthly compounding at a stated 5% earns about $511.62. That's $11.62 more than 5% simple interest would give. Try your own numbers:

Why compounding hurts on debt

The same math works against you when you borrow. Many card issuers calculate interest daily on your balance. At a 22% APR compounded daily, the effective yearly rate is about 24.6%, higher than the stated APR. That's one reason carrying a card balance gets expensive. To see how long a balance takes to pay off, use the payoff calculator.

How to compare savings accounts

1. Compare APY with APY. Don't compare one bank's APY with another's stated rate.
2. Check whether the rate is variable. Many savings rates can change at any time, so a high rate today isn't a promise.
3. Read the fees and minimums. A monthly fee or a required balance can wipe out a small rate advantage.
4. Confirm deposit insurance. Deposits at an FDIC-insured bank are covered up to at least $250,000 per depositor, per insured bank, per ownership category. Check the details in the FDIC's FAQ.

How to compare loans and cards

Look at APR, but also at fees, the loan term and whether the rate is fixed or variable. A lower APR over a longer term can still cost more in total interest than a slightly higher APR over a shorter term.