Two acronyms, one letter apart, describing the same money in different ways. The difference is compounding — and which one you are shown tells you something about who is doing the showing.
APR is the nominal annual rate and ignores compounding. APY includes it. For the same rate, APY is always higher. Banks quote APY on savings because it looks larger and APR on loans because it looks smaller — and US law requires each of those. Compare APY to APY, APR to APR, never across.
The difference in one example
Take 12% with monthly compounding.
APR says 12%. It is simply the periodic rate multiplied by the number of periods — 1% a month × 12.
APY accounts for each month's interest earning interest afterwards:
APY = (1 + 0.12/12)^12 − 1 = 12.68%Same money, same account. The 0.68 point gap is the compounding, which APR does not describe.
| Compounding | APR | APY |
|---|---|---|
| Annually | 12% | 12.00% |
| Quarterly | 12% | 12.55% |
| Monthly | 12% | 12.68% |
| Daily | 12% | 12.75% |
The more often interest compounds, the wider the gap. This is also why the true cost of carrying a credit card balance exceeds its stated APR — card interest compounds daily. See how credit card interest is actually calculated.
Why each product uses the one it does
It is not only marketing — both are legally required.
Savings and deposits must be quoted in APY. The Truth in Savings Act requires it, so that accounts compounding at different frequencies can be compared fairly. It also happens to be the larger number.
Loans and credit must be quoted in APR. The Truth in Lending Act requires it. It is the smaller number, and it exists so borrowers can compare offers on a common basis.
The consistency is the point. Two savings accounts quoted in APY are genuinely comparable, whatever their compounding schedules.
For mortgages and instalment loans, APR is not just a nominal rate — it folds in certain fees and closing costs, which is precisely what makes it useful. A loan at 6.5% interest with high origination fees can carry a higher APR than one at 6.75% with none, and the APR is telling you the truth that the interest rate alone conceals.
Credit cards are the exception. Their APR generally does not include fees, because annual and late fees are not tied to the amount borrowed. So on a card, APR is the plain nominal rate; on a mortgage, it is a fuller cost measure. Same acronym, different jobs.
When the difference matters
Barely at all on ordinary savings. At 4%, monthly versus daily compounding differs by a few hundredths of a percent. Not worth choosing a bank over.
Considerably on credit card debt. At 25% APR compounding daily, the effective annual rate is meaningfully above 25%. On a carried balance over years, that gap is real money.
A great deal on long-horizon growth. Compounding is the whole mechanism of long-term investing — see compound interest, explained with the actual numbers.
Two things that are not the same
APY is not the interest rate. It is the interest rate plus compounding. Banks sometimes show both, and the smaller "interest rate" figure is not an error.
A teaser APY is not the ongoing one. Promotional rates expire, sometimes after a few months, sometimes above a balance threshold. The advertised figure and the one you will actually earn in year two are often different numbers.
What to check when comparing
- Confirm you are comparing the same measure — APY to APY, APR to APR
- On savings, ask whether the APY is promotional and what it reverts to
- On loans, use APR rather than the interest rate, because it captures fees
- On credit cards, remember APR excludes fees — read the annual fee separately
- Check any balance cap on a high APY; many apply the headline rate only up to a limit
This is general information, not financial advice — see our disclaimer.
Frequently asked questions
What is the difference between APR and APY?
APY includes the effect of compounding; APR does not. For the same nominal rate, APY is always the higher number, and the gap widens the more frequently interest compounds.
Why do banks quote APY on savings and APR on loans?
Because each shows their product in a better light, and because US law requires it. Truth in Savings requires APY for deposits; Truth in Lending requires APR for credit.
Does APR include fees?
On loans, yes — APR is designed to fold certain fees into the rate so two loans can be compared. On credit cards it generally does not, because most card fees are not tied to the borrowing itself.
Which number should I compare when shopping?
Compare like with like. APY against APY for savings, APR against APR for loans. Comparing a loan's APR to a savings APY is comparing two different measurements.
How much difference does compounding frequency make?
At low rates, very little — a fraction of a percent. At high rates it matters considerably, which is why the gap is large on credit cards and negligible on a typical savings account.
Sources
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