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 (September 2026)
What You Should Be Earning
| Account Type | Bad APY | Roughly National Average | Good APY | Leading APY |
|---|---|---|---|---|
| Savings (big bank) | 0.01% | 0.37% (FDIC national avg, Sept. 2026) | — | — |
| High-yield savings | 2.50% | 3.00% | 3.40% | 3.75–3.95% |
| Money market | 1.55% | 3.00% | 3.55% | 3.80–3.90% |
| 12-month CD | 2.75% | 3.25% | 3.75% | 4.00% |
| Checking | 0.00% | 0.01% | 0.50% | 1.00%+ |
Rates confirmed September 2026 and change frequently — confirm current figures before comparing.
Earning Difference: 0.37% (national avg) vs 3.75% (leading HYSA) APY on $25,000
| APY | 1-Year Earnings | 5-Year Earnings | 10-Year Earnings |
|---|---|---|---|
| 0.37% | $92.50 | $466 | $941 |
| 3.75% | $938 | $5,053 | $11,126 |
| Difference | $845 | $4,587 | $10,186 |
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 |
Related: High-Yield Savings Accounts | CD Rates | Money Market vs Savings | Average Interest Rates | Compound Interest Calculator
For how APYs compare across account types, see money market vs savings account. This page is part of our savings accounts guide.
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