What Is APR?
APR (Annual Percentage Rate) shows the yearly cost of borrowing money. It includes the interest rate and certain fees, expressed as a percentage.
APR is most commonly used for loans, credit cards, and mortgages. It helps you understand how expensive borrowing really is.
What Is APY?
APY (Annual Percentage Yield) shows how much money you earn on savings or investments in one year, including the effect of compound interest.
APY is typically used for savings accounts, interest-bearing accounts, and investments.
APR vs APY: The Key Difference
- APR focuses on borrowing costs
- APY focuses on earning interest
- APY includes compounding; APR usually does not
Why Compounding Matters
Compounding means you earn interest on your interest. The more frequently interest compounds, the higher your APY will be.
You can see how this works using the Compound Interest Calculator.
When APR Matters Most
- Comparing credit cards
- Choosing between loan offers
- Understanding total borrowing cost
To estimate real payments, try the Loan Payment Calculator.
When APY Matters Most
- Comparing savings accounts
- Evaluating long-term growth
- Understanding compounding impact
For savings planning, the Savings Goal Calculator can help estimate future balances.
Common Mistakes to Avoid
- Comparing APR to APY directly
- Ignoring compounding frequency
- Looking only at interest rate, not total cost
Final Thoughts
APR and APY measure interest in different ways. Knowing which one applies — and when — helps you make smarter financial comparisons and avoid costly misunderstandings.