APY vs APR – What’s the Real Difference?

Ever looked at a savings account that touts a 2.5% APY and wondered why it’s not the same as a 2.5% APR on a credit card? You’re not alone. The two numbers sound alike but they calculate interest in completely different ways. Knowing which one you’re looking at can save you money, whether you’re trying to grow cash or keep debt costs low.

How APY Works

APY stands for Annual Percentage Yield. It tells you how much your money will grow in a year after the bank adds interest and compounds it. Compounding means the interest you earn each month gets added to the principal, and the next month you earn interest on that bigger amount. Because of this, APY is always a little higher than the plain interest rate the bank advertises.

For example, if a savings account offers a 2% interest rate that compounds monthly, the APY will be about 2.02%. The more often the interest compounds (daily, monthly, quarterly), the bigger the gap between the nominal rate and the APY.

How APR Works

APR stands for Annual Percentage Rate. It’s the cost of borrowing money over a year, expressed as a single percentage. Unlike APY, APR does not include compounding on the interest itself. Instead, it adds any fees, points, or other charges to give you a clearer picture of what the loan really costs.

Take a credit card with a 19% APR. If you carry a balance, you’ll be charged interest each day based on that rate, but the APR figure doesn’t assume the interest compounds. It’s mainly a tool to compare loan offers – the lower the APR, the cheaper the loan.

So, why does the distinction matter? If you’re choosing a savings product, look at the APY because it shows the real return after compounding. If you’re shopping for a loan or credit card, focus on the APR to understand the total cost, including any hidden fees.

Here’s a quick tip: when you see an “interest rate” without any label, ask whether it’s an APY or an APR. A 3% rate on a mortgage could be the APR (including broker fees) while a 3% rate on a high‑interest savings account is likely the nominal rate, not the APY.

Another easy way to compare is to use an online calculator. Plug in the nominal rate, the compounding frequency, and you’ll get the APY. Do the opposite for loans: add any fees to the interest rate and you’ll see the APR.

Bottom line: APY shows you how much you’ll earn, APR shows you how much you’ll pay. Keep the focus on the right number, and you’ll make smarter decisions for both saving and borrowing.