APR vs. APY: What's the Difference?

By the TidyTally team · Last updated October 21, 2026

Banks quote rates in two different ways — APR and APY — and mixing them up leads to bad comparisons. The short version: APR is the yearly rate before compounding, mostly used for loans, and APY is the yearly rate after compounding, mostly used for savings. This guide shows what each one really means, how to convert between them and which number to trust in different situations.

APR: the annual percentage rate

APR is the yearly cost of borrowing expressed as a percentage. For credit cards it is essentially the nominal interest rate. For many other loans, including mortgages and auto loans, federal rules require lenders to include certain fees in the APR, so it can be higher than the plain "interest rate" and is designed to make loans easier to compare.

Importantly, APR on its own does not tell you how often interest is added to your balance. A card with a 24% APR typically charges interest every day or month, so the amount you effectively pay over a year is more than 24% if you carry a balance.

APY: the annual percentage yield

APY is the rate you earn on savings after compounding is included. When interest is added to your balance, the next interest calculation includes the new, slightly larger balance. The more frequently interest compounds, the higher the APY is relative to the stated rate.

The formula is APY = (1 + r/n)ⁿ − 1, where r is the nominal annual rate and n is the number of compounding periods per year. Banks must disclose APY on deposit accounts, which makes savings accounts and certificates of deposit easy to compare on equal footing.

A worked example

Take a savings account with a 4.00% nominal rate compounded monthly. The APY is (1 + 0.04/12)¹² − 1 ≈ 4.07%. Compounded daily, it is about 4.08%. The difference looks small, but it is real money on a large balance held for years — and you can see it by running the same numbers through the Compound Interest Calculator with different compounding settings.

On the borrowing side, a 24% APR credit card compounding monthly costs an effective rate of about 26.8% a year if you carry a balance all year — which is why paying the balance in full each month matters so much.

Which number should you use?

When you are earning interest — savings accounts, CDs, money market accounts — compare APYs, because they already include compounding. When you are borrowing — mortgages, auto loans, personal loans — compare APRs among loans of the same type and term, because APR includes some fees. For a more complete answer on a specific loan, look at the monthly payment and the total interest over the loan life, which the Mortgage Calculator and Car Loan Calculator show directly.

Be careful with mismatched comparisons. A savings account advertising a "4% interest rate" and another advertising a "4% APY" are not identical, and a loan quoted as an "interest rate" may exclude fees that an APR would include.

Common pitfalls

Teaser rates are a classic trap: an introductory APY may drop after a few months, so check what rate applies afterwards. Variable rates — common on savings accounts, credit cards and adjustable-rate mortgages — can change with market conditions. Minimum balance requirements, monthly fees and transfer limits can eat into the headline yield.

Also, a higher APY is not automatically better if the account is not insured. Look for FDIC or NCUA insurance on deposit products.

The bottom line

Think of APR as "what a loan costs per year" and APY as "what savings earn per year after compounding." Keep your comparisons within the same category, read the fine print on fees and teaser periods, and use a calculator to see the dollars. Small rate differences compound into large sums over time.

Frequently asked questions

Keep reading

• High-Yield Savings Accounts: How to Choose
• Inflation and Your Savings
• How Mortgage Amortization Works