APR measures the annual cost of borrowing money, while APY measures the annual amount earned on a deposit after compounding.

  • APR, or annual percentage rate, is mainly used for loans and credit cards.
  • APY, or annual percentage yield, is mainly used for savings accounts, certificates of deposit and other deposit products.
  • A higher APR generally costs a borrower more.
  • A higher APY generally earns a saver more.

APR vs. APY at a glance

Feature APR APY
Full name Annual percentage rate Annual percentage yield
Used for Loans, mortgages, credit cards and other borrowing Savings accounts, CDs and other deposit accounts
Measures Annualized borrowing cost Annualized earnings
Includes compounding? Not necessarily shown as an effective annual yield Yes, APY reflects compounding
May include fees? Often includes certain loan fees, depending on the product Generally reflects interest and compounding, not most account fees
Better number for Comparing loan costs Comparing savings returns

What does APR mean?

APR is the annualized cost of borrowing money. For many loans, APR includes the interest rate plus certain fees and charges related to getting the loan.

The Consumer Financial Protection Bureau says a mortgage APR can include the interest rate, points, mortgage broker fees and other charges.

For example, a lender might advertise an interest rate of 7.00% and an APR of 7.35%. The APR is higher because it accounts for qualifying loan costs in addition to the stated interest rate. The exact APR depends on the loan amount, term, interest rate and fees included in the calculation.

For credit cards, APR usually refers to the annualized interest rate applied to balances. A card can have separate APRs for purchases, balance transfers and cash advances.

When should you compare APR?

Compare APR to APR when evaluating:

  • Personal loans
  • Auto loans
  • Mortgages
  • Credit cards
  • Other borrowing products

APR can make loan offers easier to compare because it combines the stated borrowing rate with certain finance charges. You should also review the total repayment amount, loan term, fixed or variable rate and fees that the APR does not include.

What does APY mean?

APY is the annualized return on money held in a deposit account, including the effect of compound interest. When interest compounds, previously earned interest can begin earning interest too.

The FDIC describes APY as a rate that reflects both the interest rate and the frequency of compounding.

For example, a savings account might pay a 5.00% stated interest rate and compound monthly. Its APY would be approximately 5.12%.

If you deposit $10,000 and the 5.00% rate remains unchanged for one year, monthly compounding would produce approximately $511.62 in interest, before taxes and assuming no deposits or withdrawals.

When should you compare APY?

Compare APY to APY when evaluating:

  • High-yield savings accounts
  • Certificates of deposit
  • Money market deposit accounts
  • Other interest-bearing bank accounts

A higher APY generally means more interest earned when the accounts have similar fees, balance requirements and withdrawal conditions. FDIC educational materials recommend comparing APY when shopping for savings products.

Why is APR usually higher than the interest rate?

A loan's interest rate shows the cost of borrowing the principal. APR can be higher because it may include upfront charges such as origination fees, points or broker fees.

The difference depends on the loan. A large upfront fee or a short repayment term can create a wider gap between the advertised interest rate and the APR.

APR does not necessarily include every cost. Some fees, optional products or charges outside the APR calculation may still increase the total amount you pay.

Why is APY usually higher than the stated interest rate?

APY is higher than the stated interest rate when interest compounds more than once a year.

The general relationship is:

APY = (1 + interest rate ÷ number of compounding periods) raised to the number of periods − 1

At a 5.00% interest rate:

  • Annual compounding produces a 5.00% APY.
  • Monthly compounding produces approximately a 5.12% APY.
  • Daily compounding produces a slightly higher APY.

More frequent compounding produces a higher APY when the stated interest rate stays the same.

Is a higher APR or APY better?

It depends on whether you are borrowing or saving.

  • Borrowing money: A lower APR is generally better because it indicates a lower annualized cost. You should still compare the total repayment amount and loan terms.
  • Saving money: A higher APY is generally better because it indicates higher annualized earnings. Fees and account restrictions can reduce the difference.

The simplest way to remember the difference

Compare APR with APR when you are evaluating borrowing options. Compare APY with APY when you are evaluating savings products.

An APR and an APY measure different parts of a financial transaction, so comparing them directly does not tell you which product is better.