You may have heard both of these acronyms when referring to bank accounts, loans or credit cards. It’s important to know what each of them means and how they affect you and your finances.
In short, APY is about how much your deposited money grows when you save, and APR is about how much more you pay when you borrow. Both help you understand how things work with money, whether you're earning it or using it.
APY (Annual Percentage Yield) refers to the amount of interest earned on your savings. Imagine you have money in a savings account. The bank gives you an interest payment for keeping your money there. APY is like a supercharged way of showing how much extra money you get over a year. It’s like the interest on your interest!
For example, if you put $100 in a savings account with a 5% APY, after a year, you’ll have more than $105. Why? Because the APY takes into account how often the bank adds the interest to your account. If they do it more often, your money grows a bit faster. Use our handy compound savings calculator to see how your money can grow over time.
APR (Annual Percentage Rate) is the interest rate on a loan plus any fees you pay. It’s calculated on a yearly basis and shown as a percentage. It shows you how much extra you have to pay when you borrow money.
Let’s say you borrow $100 with a 10% APR for a year. By the end of the year, you’ll have to pay back $110. This $10 extra is like the cost of borrowing that money for a year.
Since APR gives you an idea of the costs you’ll incur when you borrow money, you want that number to be low. When comparing loans, make sure you see the typical APR, not just an example that says “as low as.” Use our loan comparison calculator to help calculate APR and the effect of different rates on money you borrow.
Both APY and APR are calculated based on interest rates, but they have additional factors, too. APYs give you the most accurate idea of an account’s earning potential, while APRs give an idea of what you could owe.
Because they are both shown over a single year, they are more accurate than interest rate alone. Think of savings accounts with a higher interest rate for the first three months, or credit cards with 0% introductory rates. Comparing accounts on interest rates alone can be less accurate than when you use APR and APY.