Short answer: APR (annual percentage rate) describes the yearly cost of borrowing. APY (annual percentage yield) describes the yearly return on savings or deposits, including compounding. They are not interchangeable: use APR to compare loans and credit cards, and APY to compare savings accounts, money market accounts and certificates of deposit.
This guide explains how APR and APY differ, how US and UK rules shape what lenders and banks must disclose, and how to use each number without confusing cost with yield.
This article is for general education only. It is not financial, tax or legal advice. Product terms change; confirm current disclosures with the lender or institution and a qualified professional before you act.
APR vs APY at a Glance
| Measure | Stands for | Used for | What it mainly captures |
|---|---|---|---|
| APR | Annual percentage rate | Loans, credit cards, mortgages, many other forms of credit | Yearly cost of borrowing (interest, and often certain fees) |
| APY | Annual percentage yield | Savings, money market deposit accounts, CDs and similar deposits | Yearly interest earned, including compounding |
A higher APR usually means borrowing costs more. A higher APY usually means a deposit earns more interest (all else equal). Comparing an APR on a loan to an APY on a savings account is not a like-for-like comparison of “the same rate.”
What Is APR?
According to the Consumer Financial Protection Bureau (CFPB) glossary, APR is the cost of borrowing money on a yearly basis, expressed as a percentage rate.
The CFPB also explains that a loan’s interest rate is the cost you pay the lender for borrowing, while the APR is a broader measure that includes the interest rate plus additional fees charged with the loan (such as certain origination charges). Both are expressed as percentages. See the CFPB’s page on the difference between a loan interest rate and the APR.
Under the federal Truth in Lending Act (TILA), lenders must disclose the APR so you can compare credit offers more consistently—comparing APR to APR, not APR to a bare interest rate.
APR on credit cards
For credit cards, interest rates are typically stated as a yearly rate called the APR. The CFPB notes that on most cards you can avoid interest on purchases if you pay your balance in full each month by the due date. Details: What is a credit card interest rate? What does APR mean?
Cards may list more than one APR (for example, purchases, balance transfers or cash advances). Read the card agreement for which APR applies to which transaction and whether a promotional rate ends after a set period.
Why APR can exceed the stated interest rate
If a loan includes fees that are part of the APR calculation, the APR can be higher than the interest rate alone. That is intentional: the APR is meant to reflect more of the true yearly cost so shopping is fairer. The CFPB’s guidance on payday and other short-term credit also stresses focusing on APRs when comparing different credit products.
What Is APY?
APY is the standardized way US banks and many credit unions express how much interest a deposit account would earn over a year, including compounding. Under the Truth in Savings Act and Regulation DD (12 CFR Part 1030), the FDIC’s Truth in Savings overview defines annual percentage yield as a percentage rate reflecting the total amount of interest paid on an account, based on the interest rate and the frequency of compounding for a 365-day period (or 366 days in a leap year), calculated under Appendix A of Regulation DD.
Key points from those rules:
- APY reflects interest and compounding—not bonuses that may or may not be paid, and not most fees.
- Institutions that advertise a rate of return must generally state it as an annual percentage yield (they may also state the interest rate, but less conspicuously).
- APY must be rounded to the nearest one-hundredth of one percent and shown to two decimal places.
That is why two accounts with the same nominal interest rate can show slightly different APYs if they compound on different schedules. More frequent compounding, all else equal, raises APY relative to the stated interest rate.
APR vs APY: The Core Difference
- Direction of money: APR is about what you pay to borrow. APY is about what you earn on deposits.
- Fees: APR for many loans folds in certain lender fees. APY for deposits reflects interest and compounding; fees can still reduce what you keep, and ads may warn that fees could reduce earnings.
- Compounding: APY is built to show compounding on deposits. Loan APR disclosures follow credit rules (TILA/Regulation Z), which are a different framework from Truth in Savings.
- Shopping rule: Compare APRs only with other APRs. Compare APYs only with other APYs.
If you keep cash in a competitive high-yield savings account, the number that matters for yield is the APY. The same idea applies to a money market account or a certificate of deposit: use the disclosed APY to compare offers, then read fees, minimums and access rules.
A Simple Compounding Illustration (No Product Quote)
Suppose a savings account quotes an interest rate that compounds monthly. The APY will be a bit higher than that bare interest rate because interest earns interest. Regulation DD’s Appendix A formalizes how institutions must compute the disclosed APY so shoppers can compare products fairly. You do not need to recalculate it yourself—use the advertised APY—but understanding compounding explains why APY and “interest rate” are not always identical.
On the borrowing side, paying only the minimum on a credit card lets interest compound against you. Paying the statement balance in full by the due date is the usual way to avoid purchase interest on most cards, per the CFPB.
The UK Angle: APR for Credit, AER for Savings
In the United Kingdom, consumers still see APR on many credit products. MoneyHelper (the UK’s free money guidance service) explains that APR is made up of the interest rate plus fees that are automatically included in the loan, and that APR is useful as a benchmark when comparing similar products. See MoneyHelper: Interest rates explained.
For savings, UK ads commonly show an AER (annual equivalent rate). AER is designed to show what you could earn over a year including compounding, so you can compare savings accounts more easily—similar in spirit to the US APY, though the labels and detailed rules differ. UK deposit protection for eligible accounts is provided by the Financial Services Compensation Scheme (FSCS), not the FDIC; check current FSCS limits and coverage on official FSCS or MoneyHelper pages before you rely on them.
The Financial Conduct Authority (FCA) also publishes consumer-facing definitions of financial terms; APR remains the standard annualised cost measure for much consumer credit under FCA rules.
How to Use APR and APY in Real Decisions
- Borrowing: Line up APRs for similar loan types and terms. Ask what fees are inside the APR and which costs sit outside it (for example, optional insurance). Check your credit agreement and TILA disclosures.
- Credit cards: Note purchase APR, penalty APR if any, and whether interest is avoidable by paying in full. Factor annual fees separately when comparing rewards cards.
- Saving: Sort accounts by APY, then check minimum balance to earn that APY, monthly fees, and withdrawal limits. Variable APYs can change after you open the account.
- CDs / fixed-term deposits: Compare APYs for the same term length, and read early-withdrawal penalties.
- Do not mix labels: A 5% APY on savings is not “the opposite” of a 5% APR on a loan in a single equation for your whole financial life—taxes, fees, risk and liquidity differ.
Common Mistakes to Avoid
- Choosing a loan because the interest rate looks low while ignoring a higher APR that includes fees.
- Comparing a bank’s “interest rate” on savings to another bank’s APY.
- Assuming a promotional APR or APY lasts forever.
- Forgetting that deposit fees and loan fees outside the headline rate still affect your outcome.
- Treating APY as a guarantee of future rates on variable-rate savings accounts.
FAQ
Is a higher APR always bad?
For borrowing, a higher APR generally means a higher yearly cost for that credit product, all else equal. Sometimes a slightly higher APR with more flexible terms or fewer separate fees can still fit a situation better—but you should still compare APRs honestly and read the full agreement. This is educational information, not a recommendation of any product.
Is a higher APY always better?
A higher APY means more interest on the deposit under the assumptions built into the disclosure, but fees, minimums, variable rates, early-withdrawal penalties and insurance coverage also matter. Prefer insured deposit accounts (FDIC/NCUA in the US; FSCS for eligible UK deposits) when safety of principal is the goal.
Why do APR and APY both use the word “annual”?
Both scale costs or yields to a yearly basis so you can compare products with different terms or compounding schedules. They still measure opposite sides of the transaction: cost versus yield.
Does APY include bank bonuses?
Under Regulation DD, APY reflects interest and compounding. Certain bonuses are generally not included in APY the way ongoing interest is; institutions have separate rules for advertising bonuses. Always read the account disclosures.
What should UK readers look for instead of APY?
Look for AER on savings advertisements and APR on credit. MoneyHelper’s interest-rate guide is a clear starting point for how those labels are used in the UK.
Bottom Line
APR helps you compare the yearly cost of credit. APY helps you compare the yearly yield on deposits, including compounding. Use each number for its purpose, rely on official disclosures, and verify current rates and fees with the institution—never by mixing APR and APY as if they were the same metric.
