APR vs APY: What’s the Difference and Which Rate Matters?

APR vs APY comes down to which side of the money you are on. APR, or annual percentage rate, tells you the yearly cost of borrowing. APY, or annual percentage yield, tells you the yearly return on money you keep in a bank or credit union account, with compounding built in. Lenders lead with APR on loans and credit cards, and banks lead with APY on savings accounts and certificates of deposit (CDs).

Both numbers exist because federal law requires them, and each is calculated under its own set of rules. Here is how each one works, why they can differ from the plain interest rate, and how to use them when you compare offers, based on rules published by the Consumer Financial Protection Bureau (CFPB).

What is APR?

The annual percentage rate is the price of credit expressed as a yearly rate. Under Regulation Z, the rule that carries out the Truth in Lending Act, the APR is “a measure of the cost of credit, expressed as a yearly rate,” that accounts for the amount and timing of money you receive and the payments you make.

What makes APR useful is that it can capture more than interest. Regulation Z defines a finance charge as the cost of consumer credit as a dollar amount, covering charges you pay as a condition of getting the loan. Interest is one of them, and service, transaction and carrying charges can be others, depending on the product and the exceptions in the rule.

Congress passed the Truth in Lending Act in 1968 so that consumers could “compare more readily the various credit terms available,” in the words of the statute.

What is APY?

The annual percentage yield is the deposit-side counterpart. Regulation DD, which implements the Truth in Savings Act of 1991, defines APY as a percentage rate reflecting the total amount of interest paid on an account, based on the interest rate and how often interest compounds over a 365-day period.

That compounding piece is the key difference from the plain interest rate. Regulation DD defines the interest rate as the annual rate paid on an account that does not reflect compounding. When a bank pays interest on your interest, your balance grows faster than the stated rate alone suggests, and APY shows that effect as one number.

The rule also sets the assumptions. APY assumes your principal and interest stay on deposit for the full term with no other deposits or withdrawals, and it reflects interest only, not the value of an account-opening bonus. Accounts without a maturity date, such as a typical savings account, are calculated on an assumed 365-day term.

APR vs APY at a glance

How APY is calculated

Regulation DD spells out the formula in its Appendix A. In plain terms, APY equals 100 times the quantity (1 plus interest divided by principal), raised to the power of 365 divided by the days in the term, minus 1. When the term is exactly 365 days, it simplifies to interest divided by principal, times 100.

The regulation’s own examples show how it works. A bank that pays $61.68 in interest over a 365-day year on a $1,000 deposit is paying an APY of 6.17%. A $1,000 six-month CD that earns $30.37 over 182 days has an APY of 6.18%, because the formula annualizes the shorter term as if the money were rolled over at the same terms.

To see why compounding matters, take a hypothetical $10,000 deposit at a 4.00% interest rate. If the bank credited interest only once a year, the APY would also be 4.00%. Compounded monthly, the APY works out to about 4.07%, or roughly $407 in a year. Compounded daily, it rises to about 4.08%, or roughly $408. That is why APY, not the interest rate, is the cleaner comparison number.

How APR is calculated

APR math depends on the type of credit. Regulation Z separates closed-end loans, such as mortgages and auto loans with a set payoff schedule, from open-end credit, such as credit cards and home equity lines of credit (HELOCs).

Closed-end loans

For a mortgage or installment loan, the APR folds the finance charges you pay up front into a single yearly rate. The CFPB says a mortgage APR reflects the interest rate plus any points, mortgage broker fees and other charges you pay to get the loan, which is why it is usually higher than the interest rate.

Here is a simplified hypothetical. Borrow $200,000 for 30 years at a 6.00% interest rate and the monthly principal and interest payment is about $1,199. If you also pay $4,000 in finance charges at closing, you effectively receive $196,000 but still make the same payments, so the APR comes out to about 6.19%. Real Loan Estimates include more items, but the logic is the same.

Regulation Z also sets accuracy limits. In a regular transaction, a disclosed APR is considered accurate if it is within 1/8 of 1 percentage point of the correct figure; for irregular transactions, the tolerance is 1/4 of 1 percentage point.

Credit cards and other open-end credit

Card APRs work differently. The CFPB describes a credit card’s APR simply as its interest rate stated as a yearly rate. Under Regulation Z, the APR for open-end credit is computed by multiplying each periodic rate by the number of periods in a year.

That means a card APR does not include compounding. Many issuers calculate interest daily based on your average daily balance, using a daily periodic rate. As a hypothetical, a 24% APR works out to a daily periodic rate of about 0.0658%. If unpaid interest is added to a balance you keep carrying, the effective yearly cost can run higher than the stated APR.

Cards often carry more than one APR. The CFPB notes that issuers commonly charge one rate for purchases and different rates for cash advances or other transactions, and your statement must show each balance category with a different APR. When you pay more than the minimum, the issuer must generally apply the excess first to the balance with the highest rate.

Fixed vs variable APR

A fixed APR does not move with an index, though the CFPB notes that this does not mean it can never change; the issuer generally must notify you first and, in most cases, can apply a higher rate only to transactions made after the notice. A variable APR moves with an index rate, such as the prime rate. Your cardholder agreement explains how your rate can change.

Variable rates also complicate mortgage comparisons. The CFPB warns that the APR on an adjustable-rate mortgage does not reflect the loan’s maximum interest rate, so comparing it with a fixed-rate loan’s APR is not a like-for-like test. Our guide to what sets the mortgage rate you pay walks through fixed and adjustable loans in more detail.

Where you will see each number

On a mortgage Loan Estimate, the CFPB says the interest rate appears on page 1 under “Loan Terms” and the APR on page 3 under “Comparisons.” Credit card agreements and monthly statements list the APRs that apply to each type of balance.

On the savings side, Regulation DD requires account disclosures to state both the “annual percentage yield” and the “interest rate,” using those terms. Advertising rules are stricter: if a bank ad states a rate of return, it must state it as an annual percentage yield, and the interest rate may appear only alongside the APY and not more prominently. You can read the full calculation rules in Appendix A of Regulation DD on the CFPB website.

How to use APR and APY when you compare offers

• Borrowing: compare APRs for the same loan type, amount and term. A loan with a lower rate but large fees can carry a higher APR than a loan with a slightly higher rate and no fees.
• Do not rely on APR alone. The CFPB cautions against comparing a closed-end loan APR, which includes fees, with a HELOC APR, which does not, and against using APR alone to choose a loan.
• Avoiding card interest: on most cards, paying the full balance by the due date each month means you pay no interest on purchases, so the APR matters most if you carry a balance.
• Saving: compare APYs rather than interest rates, since APY puts different compounding schedules on equal footing. Check minimum balance rules, fees and whether the rate is fixed or variable.
• Safety: a higher yield does not change how deposits are protected. See our explainer on how FDIC deposit insurance works before moving large balances.

This article is general information, not personal financial advice.

The bottom line

APR and APY both turn a rate into a yearly figure, but they answer opposite questions. APR asks how much borrowing will cost and, for many loans, includes fees. APY asks how much your savings will earn and always includes compounding. Use APR to shop for credit, APY to shop for deposit accounts, and read the disclosures behind each number before you sign.

Interest rates on loans and savings tend to move with Federal Reserve policy and bond yields. To follow those moves as they happen, visit the LiveNewsWorld Markets Live center.

Sources

• Consumer Financial Protection Bureau, What is the difference between a mortgage interest rate and an APR? (last reviewed Aug. 28, 2026)
• Consumer Financial Protection Bureau, Ask CFPB: What is a credit card interest rate? What does APR mean?; How does my credit card company calculate the amount of interest I owe?; What is the difference between a fixed APR and a variable APR?
• Regulation Z (Truth in Lending), 12 CFR 1026.4, 1026.14 and 1026.22, via the CFPB’s interactive regulations
• Regulation DD (Truth in Savings), 12 CFR 1030.2, 1030.4, 1030.7, 1030.8 and Appendix A, via the CFPB’s interactive regulations
• 15 U.S.C. 1601 (Truth in Lending Act, Pub. L. 90-321, May 29, 1968) and 12 U.S.C. 4301 (Truth in Savings Act, Pub. L. 102-242, Dec. 19, 1991), via Cornell Law School Legal Information Institute