Financial literacy Beginner

APR vs. APY: the difference that costs you money

APR and APY both describe interest, but only one includes the effect of compounding. Here’s how to compare rates the right way.

By Maya Collins Personal finance writer
Updated Oct 2, 2026 · 5 min read

Key takeaways

  • APR (annual percentage rate) is the yearly rate without compounding; APY (annual percentage yield) includes compounding.
  • When you save, look for the highest APY. When you borrow, look for the lowest APR — and check how often interest compounds.
  • The more often interest compounds, the bigger the gap between APR and APY.

What APR means

The annual percentage rate is the yearly cost of borrowing expressed as a simple percentage. For loans, it can also include certain fees, which makes it useful for comparing offers. APR does not show the effect of interest being charged on interest.

What APY means

The annual percentage yield is the rate you actually earn — or pay — in a year once compounding is included. Because interest is added to your balance and then earns interest itself, APY is always equal to or higher than the APR for the same account.

Banks usually advertise APY on savings accounts and CDs because it’s the bigger number, and it tells you what you’ll really earn.

How compounding creates the gap

The formula is APY = (1 + APR ÷ n)^n − 1, where n is the number of compounding periods in a year. With annual compounding, APR and APY are the same. With monthly or daily compounding, APY creeps higher.

Which number to use when

Whatever you compare, make sure both offers use the same measure — an APR against an APY isn’t a fair fight.

  • Savings accounts, CDs and money market accounts: compare APY.
  • Credit cards: compare APR. Card interest typically compounds daily, so the real cost is a little higher than the stated APR.
  • Mortgages and personal loans: compare APR, which can include lender fees, alongside the interest rate.

The bottom line

APY tells you what an account really earns; APR tells you the base rate of borrowing. Convert both offers to the same measure before you choose, and remember that frequent compounding works for you on savings and against you on debt.

Frequently asked questions

Is a higher APY always better?

For savings, usually — as long as fees, minimum balances and account access suit you. A slightly lower APY at an account with no fees can still come out ahead.

Why is my credit card’s real cost higher than its APR?

Most cards compound interest daily, so if you carry a balance, interest is charged on previously added interest. The effective annual rate ends up a little above the stated APR.

About the author Maya Collins Maya writes about budgeting, saving and everyday money habits, with a focus on practical steps readers can take this week.

This guide is for educational purposes only and isn’t personalized financial, investment, tax or legal advice. Rules, limits and rates change, so confirm current figures with official sources or a qualified professional.