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APY and APR both express annualized percentages, but they answer different questions. APY is commonly used to show the annual yield on deposit accounts, while APR is commonly used to express the annualized cost of borrowing. Mixing them up can lead to bad comparisons.
What APY means
Annual percentage yield is designed to express how much a deposit can earn over a year when compounding is taken into account, assuming the account’s stated conditions are met. That makes APY useful when comparing deposit products with different compounding schedules.
Deposit accounts can include savings accounts, money market deposit accounts, and certificates of deposit. The FDIC notes that these are deposit products and explains that deposit-account disclosures include interest rates, fees, and other terms.
What APR means
Annual percentage rate is used for credit. The Consumer Financial Protection Bureau explains that, for many loans, APR is broader than the stated interest rate because it can include certain fees charged with the loan. That is why a loan’s APR can be higher than its note rate.
APR rules vary by product. A mortgage APR, an auto-loan APR, and a credit-card APR should be understood in the context of the applicable disclosure rules rather than treated as identical calculations.
APY and APR side by side
| Question | APY | APR |
|---|---|---|
| Most common use | Deposit earnings | Borrowing costs |
| Typical products | Savings, money market deposit accounts, CDs | Loans, mortgages, credit cards |
| What it helps compare | Annualized yield including compounding assumptions | Annualized cost of credit under applicable disclosure rules |
| What else to check | Fees, minimums, withdrawal rules, term | Fees, term, fixed/variable structure, payment amount |
A simple savings example
Suppose two savings products advertise the same stated interest rate but compound on different schedules. Their APYs can differ because APY incorporates compounding. The product with the higher APY would generally produce more interest over a year if the balance and other conditions were identical.
That does not automatically make it the better account. A higher APY can be offset by monthly fees, balance requirements, withdrawal restrictions, or other terms.
A simple borrowing example
Suppose two lenders offer the same stated interest rate, but one charges higher required loan fees. The CFPB explains that APR can capture certain fees in addition to the interest rate, making it a broader comparison tool for borrowing cost.
Even then, do not compare APR alone. Loan term matters. A lower APR on a much longer loan can still lead to more total dollars of interest because the balance remains outstanding longer.
Fixed and variable rates matter too
A fixed-rate product follows its contract terms for a defined period. A variable-rate product can change based on an index or formula. If the underlying index rises, the rate on a variable product may rise as well. The APR or APY you see today therefore needs to be read alongside the product’s adjustment rules.
Deposit insurance is a separate question
A high APY does not tell you whether an account is insured. The FDIC says qualifying deposit products at FDIC-insured banks are automatically insured up to applicable limits and ownership rules. Credit unions may have federal insurance through the NCUA instead. Always verify the institution and product type.
Decision checklist
- For savings, compare APY, fees, minimum balances, access rules, and insurance status.
- For loans, compare APR, payment, term, fees, prepayment rules, and fixed/variable structure.
- Use the same metric when comparing similar products.
- Read the actual account or loan disclosure before committing.
Continue learning
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Sources & methodology
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Sources, dates, and methodology matter.
EconomicHQ prioritizes primary sources for consequential financial and economic claims and identifies reporting periods for changing information. This article is educational and does not provide individualized financial, investment, tax, legal, or credit advice.