APR and APY are both ways of measuring interest, but they typically account for different things and are usually applied to different financial products.
Annual Percentage Rate, or APR, is how much interest you pay each year on money you’ve borrowed. It can include fees. You would see APR on mortgages, personal loans and credit cards.
Annual Percentage Yield, or APY, is how much interest you earn yearly on money saved or invested. You’ll see APY on accounts like certificates of deposit (CDs) and high-yield savings accounts. APY includes compound interest, or the interest you earn on your interest as it’s added to the principal over time.
Let’s take a deeper look at APR and APY.
What is APR?
APR usually represents the true annual cost of borrowing money. It includes the interest rate and may account for additional costs such as lender fees or points, providing a more comprehensive view of what a loan or carrying a balance on a credit card will cost over a year. You might see APR on:
- Credit cards (however, credit card APR typically does not include fees, such as annual fees)
- Loans, such as mortgages, auto loans, personal loans and student loans
- Lines of credit, such as home equity lines of credit (HELOCs) or personal lines of credit (PLOCSs)
How APR is calculated
APR is calculated by looking at the interest and fees you owe against the principal (the amount of money you’re borrowing). It appears as a percentage that shows how much of the principal you’ll repay each year.
How is APR different from an interest rate?
An interest rate does not include fees, while APR does. Because APR accounts for costs like mortgage points, mortgage insurance and origination fees, it can better indicate how much you’ll pay yearly.
What is APY?
APY is used to calculate how much interest you’ll earn each year, including compound interest. It’s often used for savings accounts and some fixed-interest investments. You’ll likely see APY on:
- Savings accounts, including traditional savings accounts, high-yield savings accounts and money market accounts
- Certificates of deposit (CDs)
How APY is calculated
APY is calculated based on the principal and includes the effects of interest compounding, assuming a consistent compounding frequency, such as daily or monthly, over a year.
How does compound interest work? When you first deposit money into a savings account, for example, you’ll earn interest on the initial amount of money you deposit. As your money continues to sit in a savings account, you’ll continue to earn interest on the original amount, along with any interest you’ve already earned as it compounds.
How is APY different from an interest rate?
While interest rate represents the rate at which you’ll earn interest on your principal, APY shows the total amount of interest you earn each year, including any compound interest. It better describes how much you can expect to make each year on your savings or investment.
Disclosure: This article is for general educational purposes. It is not intended to provide financial advice. It also is not intended to completely describe any Citi product or service. You should refer to the terms and conditions financial institutions provide for various products.
