APR vs APY: What’s the Difference?
Summary
Learn the difference between APR and APY, and how understanding each one could help you make smarter borrowing and saving decisions to reach your financial goals.
In this article:
It’s easy to mix up the terms annual percentage rate (APR) and annual percentage yield (APY), but they have different meanings and uses.
APR means how much money you’ll pay to borrow money, while APY shows how much you’ll earn by depositing money into a savings or interest-bearing account.
Understanding the difference between APR and APY could help you make a more informed choice if you plan to apply for a personal loan or start saving up for your next long-term goal.
What is APR?
The annual percentage rate represents the total yearly cost of borrowing money whether using a loan or a line of credit. Loans come with both an interest rate and an APR, but they’re not the same. The interest rate tells you how much you’ll pay just for borrowing. The APR gives you a better sense of the total cost since it includes some –– but not all –– of the fees referred to as finance charges, a lender may charge.1
Some borrowing options that include an APR are:
- Personal loans
- Mortgages
- Auto loans
- Student loans
- Home equity loans
- Credit cards
How does APR work?
The APR for loans and credit cards can be either fixed –– meaning it stays the same each month –– or variable, which means it can change over time. Variable rates are typically tied to a financial index and may fluctuate based on market conditions or, in some cases, change with proper notice due to the borrower’s activity.
When you apply for a new loan or line of credit, your creditworthiness may impact the interest rate and APR you receive. Other factors, such as the current prime rate –– a benchmark influenced by the Federal Reserve’s federal funds rate –– may also affect the APR.2
While these factors may affect your initial annual percentage rate, it’s important to note that your lender could later adjust your APR. For example, some lenders offer a lower “introductory” APR for the first several months after you are approved for a credit card. Once the introductory period is over, your APR goes up.
Some lenders may also charge a higher “penalty” APR if you make a late payment on your credit card. Adjustments like these are usually listed in the terms and conditions, so be sure to read all the fine print.
Calculating APR
You can use the following formula to calculate APR:3
APR = (Interest + Fees) ÷ Principal ÷ Years × 100%
For example, let’s pretend you are borrowing $1,000 for 2 years at a 12% interest rate, and there is a $50 loan origination fee. You’d calculate APR = (0.12 + 50) ÷ $1,000 ÷ 2 × 100%. The APR would be 7.5025%, which can be rounded to 7.5%.
Understanding the basic formula can be helpful, but you can also use online calculators to estimate APR rather than doing the math yourself.
What is APY?
The amount of money you might earn from a savings or interest-bearing account –– also called the rate of return –– in a year is expressed as an annual percentage yield (APY). While savings accounts have both an interest rate and an APY, the APY gives you a clearer picture of how much you could actually earn over time.
Some examples of accounts that allow you to earn interest on the money you deposit include:
- Basic savings accounts
- High-yield savings accounts
- Money market accounts
- Certificates of deposit (CDs)
The higher the APY, the more your money may grow. Even a slightly higher APY can add up to significant earnings over time. As a result, APY can be a helpful tool when comparing different investment products or savings accounts.
How does APY work?
Annual Percentage Yield is different than an interest rate. It offers a more complete picture of your potential earnings.
APY may be higher than the basic interest rate if an account offers compound interest –– a type of interest that allows you to earn returns on both the money you deposit into the account and any interest you’ve earned on that money in the past.
Two accounts may offer the same interest rate but have different APYs. For example, this might happen if the interest for one account is compounded yearly, but the interest for the other is compounded daily. Usually, APY is higher the more often interest is compounded.4
As you compare savings and investment products, it’s important to remember that APY doesn’t consider fees, like monthly maintenance or administrative fees.
Calculating APY
To calculate APY, plug two variables into this formula:5
APY = (1 + r ⁄ n) n – 1
“r” = your annual interest rate in decimal form.
“n” = the number of times the interest compounds per year.
Let’s say you’ve opened a new savings account with a 2% annual interest rate, and that the interest compounds daily. You’d solve for APY = (1 + 0.02/365) 365 – 1 with a result of 0.0202020067, which can be rounded to 2.02%.
If you deposited $100 and only considered your 2% interest rate, you’d expect $100 to become $102 after one year. However, this doesn’t account for compounding interest. The APY calculation accounts for compounding interest and is a more accurate return. You could expect to have $102.2 in the account after one year.
If all of the numbers seem overwhelming to you, don’t worry. Many calculators are available online to help you determine compound interest and APY without doing the brainwork yourself.
APR vs APY: Key differences to know
Let’s review some key differences between APR and APY.
| Key points | Annual percentage rate (APR) | Annual percentage yield (APY) |
|---|---|---|
| Represents | The cost of borrowing money | Earnings on deposited money |
| Applies to | Installment loans, credit cards, lines of credit | Savings accounts, some investment accounts, certificates of deposit (CDs) |
| Fees | Yes, includes some fees related to borrowing money | No, does not include account fees |
| Allows compounding interest | No | Yes, includes compounding interest |
Use APR and APY to make smart money moves
Understanding the APR in your loan and the APY in your savings account could give you a better idea of the cost of borrowing versus how much your savings can grow over time. With this knowledge, you can feel confident you’re on track to reach your money goals –– whether you want to take out a loan for a new car or save for a down payment on a new home.
Sources:
1,3 Investopedia. "What Is Annual Percentage Rate (APR)?"
https://www.investopedia.com/terms/a/apr.asp (accessed January 30, 2025).
2 Experian. "What Is APR?" https://www.experian.com/blogs/ask-experian/what-is-apr/ (accessed January 30, 2025).
4,5 Investopedia. "What Is the Annual Percentage Yield (APY)?" https://www.investopedia.com/terms/a/apy.asp (accessed January 30, 2025).
This article is for general education and informational purposes, without any express or implied warranty of any kind, including warranties of accuracy, completeness, or fitness for any purpose and is not intended to be and does not constitute financial, legal, tax, or any other advice. Parties (other than sponsored partners of OneMain Financial (OMF)) referenced in the article are not sponsors of, do not endorse, and are not otherwise affiliated with OMF.
