APR and APY describe the same interest through different lenses: APR before intra-year compounding, APY after. Marketing exploits the gap — loans advertise APR, savings advertise APY.
Side by side
| APR | APY | |
|---|---|---|
| Compounding included? | No | Yes |
| Advertised on | Loans and cards | Savings and CDs |
| Which is larger | Always ≤ APY | Always ≥ APR |
| Gap grows with | — | More frequent compounding and higher rates |
Strengths of each
APR — strengths
- Legally standardized for loan comparison
- Includes certain fees on mortgages
APY — strengths
- True yearly earning/cost
- Directly comparable across banks
Worked example
A card at 24.99% APR compounding daily effectively charges 28.4% (APY). A savings account at 4.2% APR compounding monthly actually yields 4.28% APY.
FAQ
Which should I use to compare?
Compare loans by APR, savings by APY — and never one against the other.
Why do the two exist at all?
Truth-in-lending law standardized APR; banks prefer showing the bigger number on deposits, which is APY.