Money guide · Savings accounts and emergency funds
APR vs. APY: what is the difference?
Compare APR and APY with a compounding example, and learn why borrowing disclosures and savings yields answer different questions.
How it works
For deposits, APY helps compare accounts that compound on different schedules. Borrowing APR has product-specific rules and may reflect certain financing charges. A mortgage APR is not simply the note rate, while a credit card APR is used to calculate interest under the card agreement. Always compare the same product and repayment assumptions.
A worked example
Suppose a deposit earns a hypothetical 4% annual interest rate compounded monthly. Its annual yield is (1 + 0.04 / 12)^12 − 1, approximately 4.074%. On $10,000 the resulting interest is about $407.42 if the rate is unchanged and interest stays in the account. A quoted 4% APY, by contrast, implies $400 for that full-year scenario.
What to compare
For savings, check APY, rate variability, fees, and required balances. For borrowing, check APR, financed amount, loan term, payment schedule, and charges that may fall outside APR. Request the total dollar cost under your expected payoff date. A short promotional period and a long standard-rate period should be modeled separately.
A common mistake to avoid
Do not use an account’s APY as a prediction of its after-tax, inflation-adjusted return. Nor should you convert a card APR into a guaranteed monthly bill without knowing balances and dates. When comparing a loan against savings, include taxes and contract terms rather than treating two annual percentages as identical cash flows.
Can two accounts have the same rate but different APYs?
Yes. Different compounding schedules can produce different APYs from the same stated interest rate, subject to the account’s terms.
Sources and further reading
Connect this to inflation
Inflation changes the spending power of money over time. Read the related inflation explainer, or compare cd growth using your own assumptions.