APR vs. APY: What’s the difference?

APR—annual percentage rate—and APY—annual percentage yield—sound similar, and they both have to do with interest rates. But there’s a lot more to it than that.

And understanding the differences between APR and APY can help you make more informed decisions when it comes to managing money.

Key takeaways

• APR represents the amount of interest you might be charged when you borrow money.
• The lower the APR, the less you may have to pay in interest when you borrow. 
• APY represents the amount of interest you might earn when you save money.
• The higher the APY, the more you may earn in interest when you save.

APR stands for annual percentage rate. It typically applies when you borrow money through loans such as: 

• Credit card
• Car loan, personal loan, home loan or student loan
• Personal line of credit or home equity line of credit

APR measures the amount of interest you’ll be charged when you borrow. The lower the APR, the less you may have to pay in interest.

APR vs. interest rates

The Consumer Financial Protection Bureau explains that when considering APR versus interest rates, “APR is a broader measure of the cost of borrowing money.” APR can include the interest rate plus other costs, like lender fees, closing costs and insurance. If there are no lender fees included in the APR, the APR and interest rate may be the same—and that’s typically the case for credit cards.

Because APR can include costs like lender fees, it may be more useful than the interest rate for comparing certain types of credit offers, like auto financing offers.

APY stands for annual percentage yield. It can also be referred to as EAR, or effective annual rate. APY or EAR typically applies to money in deposit accounts, such as:

• Savings accounts
• Money market accounts
• Certificates of deposit (CDs)

APY can show you the amount of interest an account could earn in a year. And generally, the higher the APY, the more interest your investment could earn. How much you can earn also depends on how much money you have in your account. And keep in mind that if the APY for a deposit account is variable, the yield might change after the account is opened.

APY vs. interest rates

APY is a broader measure than just the interest rate. That’s because it also reflects compound interest and how often compounding happens in a year. Compound interest means you don’t earn interest on just what you’ve deposited—you also earn additional interest on the interest you’ve already earned. 

That can make it more useful for comparing deposit accounts. For example, let’s say you’re comparing two deposit accounts that have the same interest rate. The APY might show that the one that compounds daily would earn you more interest than the one that compounds annually.

While APR and APY both measure interest, they are not the same. APR measures the interest charged, and APY measures the interest earned. 

APR is usually associated with credit accounts. The lower the APR on your account, the lower your overall cost of borrowing might be.

APY is usually associated with deposit accounts. The higher the APY on your account, the higher your earnings might be. Just remember that your earnings may also depend on how much money you have in your account—not just the APY.

APR and APY can both be useful. But calling one better than the other isn’t really appropriate. 

APR can be more useful when looking at what it costs to borrow money, while APY can be more helpful in understanding how much interest you made on a deposit account.

Here are a few common questions about APR and APY.

What is a good APR?

There’s no standard for what qualifies as a good APR. But remember: The lower the APR, the less you may have to pay in interest. And the higher the APR, the more you may have to pay in interest.

What is a good APY?

Like APR, there’s no standard for what qualifies as a “good” APY. But keep in mind that, generally, the higher the APY, the more interest you could earn.

How often does interest compound?

Interest could compound daily, weekly, monthly, quarterly or annually. Frequent compounding could earn more for your deposit accounts and cost more for your credit accounts.

Will the rate change?

If your rate is fixed, it usually won’t change. But if it’s variable, it’s more likely to change. 

If you have an introductory APR, make sure you know how long it’s going to last and what your rate will be once the introductory period ends. And keep in mind that the APY may be variable, meaning the yield might fluctuate with the market.

Which APR applies to you?

Some credit accounts have different APRs for different types of transactions. For example, credit card issuers might charge one APR for purchases and a different APR for cash advances or balance transfers.

Have you checked the fine print?

Make sure you understand all the terms and fees. Not all credit accounts include the same fees in their APRs. And some might not include any fees. Deposit accounts may also come with fees that aren’t included in the APY.

While APR measures the amount of interest you’ll be charged when you borrow, APY measures the amount of interest you earn when you save. The lower the APR, the less you may have to pay in interest when borrowing. And the higher the APY, the more you may earn in interest when saving.

Looking for a new credit card with a better APR? Compare credit cards with Capital One to see what you may qualify for.