APR vs. APY: What’s The Difference
Did you know interest rates aren’t always a scary percentage? Depending on the three letters behind the rate, it could be a good thing for you and your money, or you need to shop around and find a rate that works for you. APR and APY are financial institution acronyms that affect how you borrow money or build your savings. Learn more about how they can help you make more confident money moves.
What Is APR?
APR, or Annual Percentage Rate, is the true cost of borrowing money from a financial institution. It includes the interest rate and lender fees. Essentially, it’s the overall cost to take out a loan. When you need a mortgage, auto loan, personal loan, credit cards, etc., it’s in your best interest to pay attention to the APR. Generally, for loans, you want to choose a lower APR. The lower the APR, the less you have to pay for the total loan over time.
What Is APY?
While APR is about how much a loan costs you, APY is all about growing your savings. APY stands for Annual Percentage Yield. These three letters tell you how much you will earn on your savings year over year, assuming the interest is added to the deposit and compounds. It adds the interest rate and how often the balance is compounded – daily, weekly, or quarterly, to give an accurate view of your earning potential. A higher APY means your money works harder for you, especially over time.
Understanding Both
They typically apply to different financial products
You will see APRs applied onto lending products like:
- Mortgages
- Personal loans
- Auto loans
- Student loans
- Credit cards
- Home equity lines of credit (HELOCs)
APY applies to savings and investment products like:
- Savings accounts
- Checking accounts
- Savings certificates
- Money market accounts
You want one high & one low
To keep the monthly and overall cost of a loan down, you want a lower APR. Ideally, when shopping for a loan, you want the lowest APR possible. On the other hand, on a savings product you want the highest APY possible. The higher the APY, the more your money will grow in your savings or investment account.
Interest on both can compound
Compound interest means you’re earning—or being charged—interest not only on the original amount but also on the interest that has already built up. It’s a powerful force that can work in your favor or against you. When you’re borrowing, compound interest can increase the total amount you owe over time, especially if you carry a credit card balance from month to month. But when you’re saving or investing, that same compounding effect helps your money grow faster, boosting your earnings the longer you keep your funds deposited.
Show Me The Math
Even though APR and APY look almost identical on paper, they measure two completely different financial realities — one tied to borrowing and the other tied to saving. One way to think about it:
- APR = what you pay
- APY = what you earn
For example, let’s say you need to borrow money for an auto loan. You take out $10,000 at a 5% APR for 60 months. During that term, you will have paid $1,323 in total interest on the loan.
If you deposit $10,000 into a savings certificate and lock in a 5% APY rate for 60 months, you will have earned $2,762.82. That’s your money working for you!
APR helps you borrow wisely; APY helps you save smarter. Understanding the difference between APR and APY gives you a clearer view of how your money moves—whether it’s the cost of borrowing or the growth of your savings. With this knowledge, you are better equipped to compare products and avoid surprises.