APR vs. APY: Borrowing Cost and Savings Yield

APR describes an annualized borrowing rate

APR expresses the annual cost of credit under product-specific disclosure rules. On a credit card, the periodic rate is derived from APR and interest can depend on daily balances. On installment loans, APR can include certain finance charges beyond the note rate.

Do not assume every APR contains the same fees. Compare disclosures for the same product type and term.

APY includes deposit compounding

APY expresses the effective annual yield on a deposit after the stated compounding frequency. A nominal 5% rate compounded monthly produces an APY slightly above 5% because interest earns interest during the year.

Use the CD calculator to compare nominal rate, compounding, and APY. Use the compound-interest calculator for recurring contributions.

Why APR and APY cannot be swapped

A 5% APR loan and 5% APY savings account are not mirror images. Loan fees, balance timing, taxes on interest, compounding conventions, and payment schedules differ. The labels also follow different disclosure frameworks.

For borrowing, compare APR, fees, payment, and total dollars over the same term. For deposits, compare APY, fees, balance requirements, withdrawal restrictions, and how long the quoted yield is fixed.

Convert carefully

For a nominal annual rate r compounded m times:

APY = (1 + r ÷ m)ᵐ − 1

The formula only applies when the stated rate and compounding assumptions match. Variable-rate accounts can change before a full year passes.

Use the percentage that matches the decision

APR helps compare credit cost; APY helps compare deposit yield. Total dollars and contract terms remain necessary. A small percentage advantage can be overwhelmed by an origination fee, early-withdrawal penalty, annual account fee, or short holding period.