GuidesAPY vs. APR: What's the Difference and Which One Should You Compare?

APY vs. APR: What's the Difference and Which One Should You Compare?

By Rateboard Editors · Last reviewed October 1, 2026

Banks and lenders love three-letter abbreviations, and APY and APR are the two you see most often. They look similar and both are expressed as a percentage per year, but they answer different questions. APY tells you how much you will earn on savings. APR tells you how much borrowing will cost. Mixing them up can make a savings account look better than it is or a loan look cheaper than it is.

APY: annual percentage yield

APY is the total return on a deposit over one year, including the effect of compounding. Compounding means that interest you earned earlier starts earning interest itself.

If a bank pays interest monthly, each month's interest is added to your balance, and the next month's interest is calculated on that slightly larger balance. Over a year, this makes your effective return a little higher than the simple "nominal" rate.

The formula is:

APY = (1 + r/n)^n − 1

where r is the nominal annual rate and n is the number of compounding periods per year.

In the U.S., the Truth in Savings Act and its regulation require banks to disclose APY on deposit accounts, which makes it the fairest way to compare savings accounts and CDs. Two accounts with the same APY will earn the same amount on the same balance over a year, even if one compounds daily and the other monthly.

APR: annual percentage rate

APR is the yearly cost of borrowing. What it includes depends on the product:

Credit cards: APR is essentially the interest rate. It is usually applied as a daily periodic rate (APR divided by 365 or 360) to your balance. Because unpaid interest gets added to the balance, the effective annual cost of carrying a balance is higher than the stated APR.
Mortgages and installment loans: APR is designed to include not only the interest rate but also certain upfront costs, such as discount points and some lender fees, spread over the loan term. That is why a mortgage APR is usually a bit higher than the note rate.

Under the Truth in Lending Act, lenders must disclose APR so consumers can compare credit offers on a more equal footing.

Why APR usually understates the cost of compounding debt

APR is a nominal rate. It does not reflect compounding the way APY does. For a credit card where interest compounds, the true annual cost of carrying a balance all year is higher than the APR. Lenders are not required to advertise that higher figure, which is one reason card debt is more expensive than it looks.

Worked example (illustrative numbers only)

These numbers are for teaching only. They are not current rates.

Savings: A bank advertises a nominal rate of 4.89% compounded monthly. The APY is:

(1 + 0.0489/12)^12 − 1 ≈ 5.00%

On a $10,000 balance kept for a year, you would earn about $500, not $489. That difference is compounding.

Credit card: A card has a 24% APR. If interest compounded monthly on a balance you never paid down, the effective annual rate would be:

(1 + 0.24/12)^12 − 1 ≈ 26.8%

With daily compounding it would be slightly higher, around 27.1%. A $5,000 balance carried for a full year with no payments would grow by roughly $1,340 to $1,355, not the $1,200 a quick "24% of $5,000" estimate suggests.

Mortgage: A mortgage might have a 6.50% note rate but a 6.70% APR. The extra 0.20 percentage point reflects points and fees folded into the APR calculation. The monthly payment is based on the 6.50% note rate; the APR is a comparison tool.

Which number to use when

Situation	Compare this	Why
Savings accounts, CDs, money market accounts	APY	Includes compounding, standardized disclosure
Credit cards	APR, plus how you pay	Lower APR matters only if you carry a balance
Mortgages	APR and the note rate	APR captures fees; note rate sets the payment
Auto and personal loans	APR	Includes certain fees, standard comparison

Pitfalls to watch for

Comparing APY on one account to "rate" on another. Always compare APY to APY.
Promotional APYs. An introductory rate may apply only for a few months or only on a limited balance.
Mortgage APR assumes you keep the loan to term. If you will refinance or sell in a few years, upfront fees matter more than APR suggests, because you are spreading them over a shorter period.
Card APR ranges. Many cards advertise a range, and you will not know your rate until you are approved. Penalty APRs can apply after late payments.
"Interest rate" on a loan ad. If an ad shows only a rate, ask for the APR so you can see the fees.

A quick mental shortcut

Think of it this way: APY is the number that is on your side, and you want it high. APR is the number that is against you, and you want it low. When a product is a deposit, look for APY. When it is a loan or card, look for APR, then ask what fees and compounding sit behind it.

FAQ

Is APY always higher than the interest rate?

For accounts that compound more than once a year, APY will be slightly higher than the nominal rate. If interest compounds only once a year, the APY and nominal rate are equal.

Why is my mortgage APR higher than my rate?

Mortgage APR includes certain costs, such as discount points and some lender charges, spread over the loan's life. The higher the upfront fees, the bigger the gap between the APR and the note rate.

Does paying my credit card in full mean APR does not matter?

If you pay the full statement balance by the due date every month, most cards do not charge purchase interest, so the APR has little practical effect. It matters a great deal as soon as you carry a balance or take a cash advance.

See compounding in action

Enter a balance and APY into the Rateboard compound interest calculator to see how much a savings account could grow. For the borrowing side, the card payoff calculator shows how APR drives the time and interest needed to clear a balance.

Rateboard guides are educational and are not financial advice. Check the official disclosures for any account or loan you are considering.