APR vs. APY: What’s the difference?
Annual percentage rate (APR) and annual percentage yield (APY) both measure interest, but they’re not the same. APR measures the interest charged when you borrow money and is usually associated with credit accounts. APY measures the interest earned when you save or invest money and is usually associated with deposit accounts.
In other words, APR represents the cost of borrowing money. So the lower the APR on your account, the lower your overall cost of borrowing might be. APY represents how much you can earn. So the higher the APY on your account, the higher your earnings might be.
What you’ll learn:
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Credit cards, auto loans, personal loans, mortgages, and other loans and lines of credit are examples of credit accounts that have an APR.
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An APR is a more accurate representation of the cost of borrowing than the interest rate because the APR includes other fees and costs.
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High-yield savings accounts, money market accounts and certificates of deposit (CDs) are examples of deposit accounts that have an APY.
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An APY is a more accurate depiction of interest earned because it incorporates compound interest.
What is APR?
APR measures the amount of interest and any other fees you’ll be charged over the course of a year when you borrow.
APR typically applies when you borrow money through various types of credit, such as:
- Credit cards
- Car loans
- Personal loans
- Home loans
- Student loans
- Personal lines of credit
- Home equity lines of credit
APR vs. interest rate
The Consumer Financial Protection Bureau (CFPB) explains that an APR differs from an interest rate because an APR includes the interest rate plus other costs, like lender fees, closing costs and insurance. If there are no lender fees included in the APR, the APR and interest rate may be the same. That’s typically the case for credit cards.
Because APR can include costs like lender fees, it may be more useful than the interest rate for comparing certain types of credit offers, like auto loans.
What is APY?
APY represents the rate at which an account could earn interest over a year. But how much you can earn also depends on how much money you have in your account. And keep in mind that if the APY for a deposit account is variable, the yield might change after the account is opened.
APY can also be referred to as EAR, or effective annual interest rate. APY or EAR typically applies to money in deposit accounts, such as:
APY vs. interest rate
APY is a broader measure than just the interest rate because it also reflects compound interest and how often compounding happens in a year. Compound interest means you don’t earn interest on just what you’ve deposited. You also earn interest on the interest you’ve already earned.
That can make APY more useful than the interest rate when comparing deposit accounts. For example, let’s say two deposit accounts have the same interest rate. The APY might show that the one that compounds daily would earn you more interest than the one that compounds annually.
APR vs. APY: Which is better?
APR and APY can both be useful. Calling one better than the other isn’t really appropriate since they represent different things.
APR can be more useful when looking at what it costs to borrow money, while APY can be more helpful in understanding how much interest you make on a deposit account.
APR vs. APY FAQ
Here are answers to a few common questions about the differences between APR and APY.
What is a good APR or APY?
There’s no set standard for what qualifies as a good APR or APY. But remember: The lower the APR, the less you may have to pay in interest. And generally, the higher the APY, the more interest you could earn.
Can APR and APY rates change?
Yes, APR and APY rates can change. If a rate is fixed, it usually won’t change. But if it’s variable, it’s more likely to change.
If you have an introductory APR, make sure you know how long it’s going to last and how much your APR may increase once the introductory period ends. And keep in mind that your APY may be variable, meaning your yield might fluctuate with the market.
Key takeaways: APR vs. APY
While APR measures the amount of interest you’ll be charged when you borrow, APY measures the amount of interest you’ll earn when you invest or save. The lower the APR, the less you may have to pay in interest when borrowing. And the higher the APY, the more you may earn in interest when saving.
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