APY vs. APR: How do they affect my interest rate?

APY is how much interest you could earn in one year, while APR is how much interest you could owe in a year.

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Derek SilvaSenior Editor & Personal Finance ExpertDerek is a former senior editor and personal finance expert at Policygenius, where he specialized in financial data, taxes, estate planning, and investing. Previously, he was a staff writer at SmartAsset.

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Key takeaways

  • APY applies to savings accounts and tells you how much interest you’d _earn_ if you left your money in a savings account for one year

  • APR applies to loans and tells you the rate at which interest accrues on your debt if you don't pay it

  • APY is different from an interest rate because APY includes compound interest

  • APR doesn't include compound interest but it does include other fees and costs, like loan origination fees

Annual percentage yield (APY) and annual percentage rate (APR) are two ways to express the interest that accumulates on different financial products. APY applies to savings products to show you how much interest you earn if you leave money in your account for one year. APR applies to loan products and debt to show how much interest you would owe if you didn’t pay your balance.

Types of accounts that use APY include a savings account, checking account, certificate of deposit (CD), and money market account. Common financial products using APR include credit cards, mortgages, and student loans.

APY and APR are also different from an account’s interest rate. An interest rate, whether you’re talking about a savings account or debt you owe, is the rate at which interest accumulates. However, APY and APR both include other factors that cause your interest to accumulate more quickly than that simple interest rate. APY factors in compound interest and an APR includes other fees.

In this article

What is annual percentage yield (APY)?

The APY is the amount of interest you would earn from a deposit account — like a savings account or checking account — if you left money untouched in your account for one year. APY is not the same as the account’s interest rate, because APY factors in compound interest.

What is compound interest?

Compound interest works by applying an interest rate to your account balance, adding the interest you earn to the original balance, and then applying the interest rate to the new account balance.

As an example, let’s say you put $100 in a savings account with a 1% interest rate. Your $100 earns $1 of interest after one month. The next month, the interest rate applies to $101 instead of your original $100, and you earn $1.01 of interest (1% of $101). For the third month, the interest rate applies to your new balance, which is $102.01. Your interest rate doesn’t change but your balance does, so your effective interest rate is higher each month and you ultimately earn more than with simple interest (which you would calculate as $100 x 1% x 12 months).

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Depending on the bank you use and the type of account you have, your money may compound daily, monthly, quarterly, or even just once per year. The more often your money compounds, the more interest you will earn over time.

APY vs interest rate

When you look at the terms for a savings account, you’ll usually see an interest rate and an APY that’s slightly higher. The difference is the effect of compound interest. Accounts with very low interest rates may list the APY and interest rate as the same value since the difference is less than one hundredth of a percent.

For example, an account with an APY of 1.00% actually has an interest rate of 0.995%. However, a savings account with an interest of 0.01% will usually say the APY is also 0.01% since the difference is too small to point out.

Keep in mind you won’t ever actually earn the full APY unless you don’t touch the money in your account for a whole year. Most people regularly deposit or withdraw money, so they don’t earn the full APY of their original balance.

Learn more: How the different types of savings accounts can save you money.

What is an annual percentage rate (APR)?

The APR is the rate at which a loan’s principal balance accrues interest over a year. APR allows you to determine how much your debt will increase over time. APR is used for all types of debt and loans, including credit card debt, mortgages, auto loans, personal loans, business loans, and student loans. If you get a cash advance on your credit card or overdraft on a savings account, any interest you owe will also be expressed as an APR.

APR vs interest rate

An APR is different from a loan’s interest rate because APR includes fees and other costs you have to pay the lender. That’s why your APR is usually higher than your interest rate. Common costs included in APR are loan origination fees, closing costs, mortgage points, discount points, and mortgage insurance.

What is a periodic rate?

Your APR is an annual rate, but lenders often calculate and apply interest more frequently by using periodic rates. A periodic rate is your APR divided into shorter periods of time, so that you can calculate how interest applies daily, monthly, or quarterly.

Here are common periodic rates:

  • Your daily periodic rate (DPR) is your APR divided by 365 or 360, depending on the lender.

  • Your monthly periodic rate is your APR divided by 12.

  • Your quarterly periodic rate is your APR divided by four.

Importantly, APR does not include the effect of compounding interest and you need to know your periodic rate to know how often interest compounds. So if your lender uses a daily rate, your DPR is applied to your account balance each day, the interest is added to your balance, and then the DPR applies the next day based on the new account balance. This compounding interest means that the rate you actually end up paying (the effective interest rate) can be higher than your APR.

APRs are still the best way to compare rates from different lenders, but make sure to read the terms of any loan so you understand how the lender compounds interest.

Do investment accounts earn interest?

Some investments, like a money market fund, can also gain interest if the market is doing well. But interest from investment accounts is typically expressed as a rate of return or as an annual percentage return. Investments may offer higher returns than what you get from a savings account’s APY, but there’s a higher risk that you lose money when the stock market underperforms.

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