What is the difference between APY and APR?

APY (Annual Percentage Yield) includes compounding — when you earn interest on interest — and is typically used for savings and deposit accounts. APR (Annual Percentage Rate) is a simple annual rate that doesn't account for compounding and is used for loans. A 5.00% APY earns you more than a 5.00% APR would charge you, because APY includes compound growth.

Is a higher APY or APR better?

For savings: you WANT a higher APY (you earn more). For loans: you WANT a lower APR (you pay less). APY is always equal to or higher than the equivalent APR because APY includes compounding. When comparing savings accounts, always compare APY to APY. When comparing loans, compare APR to APR.

APY vs APR: What's the Difference and Why It Matters (2026)

APY and APR look similar but work very differently. Confusing them can cost you money.

APY vs APR: The Key Difference

	APY (Annual Percentage Yield)	APR (Annual Percentage Rate)
Used for	Savings, CDs, deposit accounts	Loans, mortgages, credit cards
Includes compounding?	Yes	No
You want it to be	Higher (you earn more)	Lower (you pay less)
Measures	What you actually earn	What you’re charged (simple rate)
Legally required to disclose	For deposit accounts (Truth in Savings Act)	For loans (Truth in Lending Act)

How Compounding Affects Your Money

Savings: $10,000 at 5% for 1 Year

Compounding Frequency	APR	APY	You Earn
Annual (1x/year)	5.00%	5.00%	$500.00
Semi-annual (2x/year)	5.00%	5.06%	$506.25
Quarterly (4x/year)	5.00%	5.09%	$509.45
Monthly (12x/year)	5.00%	5.12%	$511.62
Daily (365x/year)	5.00%	5.13%	$512.67
Continuous	5.00%	5.13%	$512.71

The more frequently interest compounds, the more you earn.

Over Longer Time Periods ($10,000 at 5% APR, Monthly Compounding)

Years	Simple Interest (APR only)	Compound Interest (APY)	Difference
1	$10,500	$10,512	$12
5	$12,500	$12,834	$334
10	$15,000	$16,470	$1,470
20	$20,000	$27,126	$7,126
30	$25,000	$44,677	$19,677

APR for Loans: What to Watch For

Mortgage APR Breakdown

Component	What It Includes
Interest rate	The base rate on the loan
+ Origination fees	Lender’s processing charge
+ Discount points	Optional rate buy-down
+ Mortgage insurance	PMI/MIP if applicable
+ Other closing costs	Certain fees rolled in
= APR	True annual cost of borrowing

Comparing Two Mortgage Offers

Feature	Lender A	Lender B
Interest rate	6.25%	6.00%
Points	0	1 ($3,360)
Origination fee	$1,000	$2,000
Other fees	$2,000	$2,500
APR	6.35%	6.28%
Monthly payment (P&I)	$2,069	$2,015
Break-even for points	—	62 months (~5 years)

Lender B has a lower APR but higher upfront costs. Better if staying 5+ years.

Credit Card APR vs True Cost

Advertised APR	Compounding	Effective Annual Rate (APY equivalent)
18.00%	Daily	19.72%
22.00%	Daily	24.60%
25.00%	Daily	28.39%
29.99%	Daily	34.96%

Credit cards compound daily, so the true cost is significantly higher than the advertised APR.

Common Situations Where APY/APR Confusion Costs Money

Situation	Mistake	Cost
Comparing savings accounts	Using interest rate instead of APY	Miss higher-yielding option
Choosing credit card	Ignoring daily compounding on APR	Underestimate true cost
CD shopping	Comparing APY of annual vs monthly compounding CDs	They’re already apples-to-apples if comparing APY
Mortgage shopping	Comparing rate instead of APR	Miss hidden fees
Personal loan	Not asking about APR vs rate	May have hidden origination fees

APY on Common Accounts (2026)

What You Should Be Earning

Account Type	Bad APY	Average APY	Good APY	Great APY
Savings (big bank)	0.01%	0.05%	—	—
High-yield savings	3.50%	4.50%	5.00%	5.25%
Money market	3.00%	4.00%	4.75%	5.00%
12-month CD	3.50%	4.50%	5.00%	5.50%
Checking	0.00%	0.01%	0.50%	3.00%+

Earning Difference: 0.01% vs 5.00% APY on $25,000

APY	1-Year Earnings	5-Year Earnings	10-Year Earnings
0.01%	$2.50	$12.50	$25.00
5.00%	$1,250	$6,907	$15,722
Difference	$1,247	$6,895	$15,697

Quick Rules

Rule	Explanation
For savings: compare APY to APY	APY already includes compounding; apples-to-apples
For loans: compare APR to APR	APR includes fees; gives true borrowing cost
Higher APY = more earnings	Want this on savings
Lower APR = less debt cost	Want this on loans
APY ≥ APR always	Because compounding adds to yield
Daily compounding > monthly > annual	More frequent = more benefit (savings) or cost (debt)
“Interest rate” ≠ APR for loans	APR includes fees the rate doesn’t