APR vs. APY: What’s the difference?
Annual percentage rate (APR) and annual percentage yield (APY) sound similar, and they both have to do with interest rates. But there are differences between the two.
APR is the yearly rate you’ll pay on a loan, including interest and other fees. It represents the cost of borrowing money. APY is the rate of return you can expect when saving or investing money. It represents how much you can earn, factoring in compound interest.
Understanding the differences between APR and APY can help you make more informed decisions when it comes to managing money.
Key takeaways
- APR represents the amount of interest and fees you might be charged when you borrow money.
- The lower the APR, the less you may have to pay in interest when you borrow.
- APY represents the amount of interest you might earn when you save or invest money.
- The higher the APY, the more you may earn in interest.
What is APR?
APR typically applies when you borrow money through loans, such as:
- Credit cards
- Car loans
- Personal loans
- Home loans
- Student loans
- Personal lines of credit
- Home equity lines of credit
APR measures the amount of interest and any other fees you’ll be charged when you borrow. The lower the APR, the less you may have to pay in interest.
APR vs. interest rate
The Consumer Financial Protection Bureau explains that, when considering APR versus interest rates, APR can include 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 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 can show you the amount of interest an account could earn in a year. And generally, the higher the APY, the more interest your investment could earn. 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 vs. interest rate
APY is a broader measure than just the interest rate. That’s 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 additional interest on the interest you’ve already earned.
That can make it more useful for 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.
What is the difference between APR and APY?
Although APR and APY both measure interest, they are not the same. In general, APR measures the interest charged when you borrow money, whereas APY measures the interest earned when you save or invest money.
APR is usually associated with credit accounts. The lower the APR on your account, the lower your overall cost of borrowing might be.
APY is usually associated with deposit accounts. The higher the APY on your account, the higher your earnings might be. Just remember that your earnings may also depend on how much money you have in your account—not just the APY.
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 a few common questions about APR and APY.
What is a good APR?
There’s no set standard for what qualifies as a good APR. But remember: The lower the APR, the less you may have to pay in interest. And the higher the APR, the more you may have to pay in interest.
It’s also important to make sure you understand all of your terms and fees. Not all credit accounts include the same fees in their APRs. And some might not include any fees. Either way, ensuring you clearly understand what fees, if any, are associated with your APR can help you better understand your overall cost of borrowing.
What is a good APY?
Like APR, there’s no set standard for what qualifies as a good APY. But keep in mind that, generally, the higher the APY, the more interest you could earn.
How often does interest compound?
Interest could compound daily, weekly, monthly, quarterly or annually. Frequent compounding could earn more for your deposit accounts and cost more for your credit accounts.
Can APR and APY rates 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.
APR vs. APY in a nutshell
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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