APR vs. APY: What's the Difference?

APR (Annual Percentage Rate) and APY (Annual Percentage Yield) are both ways to express interest rates, but they measure different things. APR is the simple annual interest rate without accounting for compounding. APY includes the effect of compounding within the year, making it a more accurate measure of the true cost or return.

APR

  • • Simple interest rate
  • • Does not include compounding
  • • Used for loans and credit cards
  • • Always ≤ APY

APY

  • • Includes compounding effect
  • • True annual return/cost
  • • Used for savings accounts
  • • Always ≥ APR

The Formula

APY = (1 + APR/n)^n − 1

where n = number of compounding periods per year

Banks are required by law to disclose APY for savings products and APR for loan products. When comparing savings accounts, always use APY. When comparing loans, use APR — but be aware that APR for loans often includes fees, making it a more comprehensive cost measure.