APR vs. APY: What’s the Difference?
Whether you’re saving money or borrowing it, you’ll come across the terms Annual Percentage Rate (APR) and Annual Percentage Yield (APY). APR tells you how much interest you'll pay for money you borrow and includes fees. APY tells you how much interest you can earn on savings and includes compound interest.
What is APR?
APR applies to borrowing money, such as with a loan or credit card balance. The APR includes the basic interest rate on the loan and any fees. It lets you know how much you’ll pay to borrow the money for an entire year. You can then use this information to get an idea of what you’ll end up paying over the life of the loan. The higher the APR, the more interest you'll have to pay.
If you plan to take out a loan or compare credit cards, you’ll want to look closely at the APR to find the best rate for your needs.
What is APY?
APY refers to the amount of money you’ll earn over a year on the money you save or invest, including compounding interest. Compounding regularly adds the interest you earn to the amount of money in your account, whether it’s money you’ve deposited or interest you’ve already earned. Interest can compound daily, monthly, or annually. The more frequently it happens, the faster you’ll earn money. The higher the APY, the better.
When comparing savings and investment accounts, you should compare the APY. This will tell you which account will help you earn the most money.
FAQs about the differences between APR and APY
APR is applied to loans, credit cards, and mortgages to show the expense of borrowing money. It encompasses both interest rates and fees. APY is for savings and investments to show the potential earnings. APY factors in compounding interest to give a more accurate depiction of the potential earnings over time.
Since the APR gives you an idea of the costs of having a credit card or loan, it’s preferable for that number to be low. In fact, when it comes to finding the best APR, you want to look for the lowest number possible. For APY, you’re looking to see how much interest you can gain from a potential account or investment. That means you want the APY to be as high as possible.
APR does not factor in compounding interest. Instead it is based solely on the interest rate and fees. In contrast, APY uses compounding interest to show you a more precise assessment of your return. To see the difference compound interest rates can make for your bottom line, plug your numbers into our savings calculator.
Since both APR and APY are shown over a single year, they are more accurate than interest rate alone. For example, a savings account may have a higher interest rate for the first three months, or a credit card may have a 0% introductory rate. The APR and APY take those factors into account, to give you the average rate for one year. Since APR is calculated by adding the interest rate along with any fees for borrowing the money, it realistically shows what you could owe. Since APY is calculated by considering the effect of compounding interest on the investment, it realistically shows how much you could earn. Comparing accounts on interest rates alone can be less accurate than when you use APR and APY.