APY vs APR Explained

APY and APR are both ways financial institutions describe interest rates, but they are not the same thing.

Understanding the difference can help you compare savings accounts, CDs, loans, and credit cards more accurately.

What Is APR?

APR stands for Annual Percentage Rate.

APR usually represents the basic yearly interest rate without accounting for compounding.

Example: A loan with a 7% APR charges roughly 7% interest annually before considering compounding frequency or fees.

APY stands for Annual Percentage Yield.

APY includes the effects of compound interest, which means it reflects the real amount earned or paid over a year when interest compounds.

Example: A savings account with 5% APY may compound interest daily or monthly, resulting in slightly higher real returns than a simple 5% APR.

APY is especially useful when comparing:

The more frequently interest compounds, the larger the difference between APR and APY can become.

Compound interest allows your money to begin earning returns on previous gains. Over long periods of time, this effect can become very powerful.