APR vs. APY: What’s the Difference?

APR and APY are two numbers that show up constantly in personal finance, on loan offers, savings account disclosures, credit card agreements and investment products. They look similar and are easy to confuse, but they measure different things. Understanding the distinction helps you compare products and make better financial decisions.

Did you know? APR and APY are standardized disclosure measures required by federal regulations—APR under Regulation Z (Trust in Lending Act) and APY under Regulation DD (Truth in Savings Act).

What is APR?

APR stands for Annual Percentage Rate. It represents the yearly cost of borrowing money, expressed as a percentage. You’ll see it on credit cards, personal loans, mortgages, auto loans and other credit products.

APR includes the interest rate plus any fees that are part of the cost of the loan (origination fees, for example), which is why it’s sometimes higher than the stated interest rate alone. The idea is to give borrowers a more complete picture of what a loan actually costs.

There are a few types of APR worth knowing:

• Fixed APR: stays the same for the life of the loan or credit agreement
• Variable APR: tied to an index rate (like the prime rate) and can change over time. Most credit card APRs are variable
• Introductory APR: a promotional rate that applies for a limited time, after which the standard rate kicks in. Common on balance transfer offers
• Penalty APR: a higher rate that some credit cards apply if you miss a payment

When comparing loan offers, APR is often a more useful number than interest rate alone because it accounts for fees. Two loans with the same interest rate but different fees will have different APRs.

What is APY?

APY stands for Annual Percentage Yield. It represents how much you earn on your deposits or investments in a year.

The APY accounts for compound interest. Compounding means you earn interest on your interest. The more frequently interest compounds (daily, monthly, quarterly), the more you earn over time—even at the same stated rate. A simple interest rate doesn’t include a calculation of compound interest, making it less useful than APY.

You’ll see APY on savings accounts, some checking accounts, money market accounts and certificates of deposit (CDs). Generally, the higher the APY, the more your money grows.

How do APR and APY relate to each other?

The key distinction is cost vs. earning:

• APR applies when you’re borrowing. It tells you what the debt will cost you.
• APY applies when you’re saving or earning. It tells you what your money will earn.

For borrowing, a lower APR is better. For saving, a higher APY is better.

The two can also be compared to understand the real cost or benefit of financial decisions. For example, if your savings account earns 4.5% APY and your credit card has a 22% APR, you’re losing ground by carrying a balance rather than using savings to pay it off. Mathematically, it’s usually better to pay off high-APR debt than to carry that debt and save or invest at the same time.

Why lenders use APR and savings products use APY

Lenders often quote APR (which doesn’t include compounding) because it may make the cost of borrowing look lower. Savings products use APY (which does include compounding) because it may make the return look higher. Both are accurate representations; they just emphasize different aspects.

APR and APY use different calculation methods and emphasize different aspects of financial products.

When comparing products, make sure you’re comparing like to like. Two savings accounts should both be compared using APY. Two loan offers should both be compared using APR.

What to look for when evaluating financial products

• For loans and credit: compare APR, not just the interest rate. Ask whether the APR is fixed or variable and what fees are included.
• For savings accounts and CDs: compare APY. Ask how frequently interest compounds—daily compounding produces slightly more than monthly at the same stated rate.
• For credit cards with introductory offers: note when the introductory rate expires and what the standard APR will be afterward.

Explore your options with Horizon

Whether you’re looking for a savings account with a competitive APY or a loan with a straightforward APR, Horizon has great options. Check them out online or give us a call! Our team is happy to walk you through the details.