App version: 0.1.0

Guide to APY vs APR

APY vs APR: What's the Difference?
Lauren Ward
Lauren WardUpdated March 20, 2023
Share this article:
Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
It’s easy to confuse APY and APR. They look and sound similar and both have to do with interest rates. However, these terms refer to two very different things. APR stands for annual percentage rate. It tells you the amount of interest you'll pay when you borrow money. APY stands for annual percentage yield. It tells you the amount of interest you'll earn when you save money.Whether you're looking to borrow or save, understanding the difference between APR vs APY can help you make smart decisions about your money. Here’s a closer look at each.

What Is APR?

APR is the total cost of a loan over one year. It includes interest, but also other costs (such as lender fees, closing costs, and insurance), and is expressed as a percentage.Using APR, rather than just an interest rate, allows you to compare multiple loan products apples to apples, since it represents the true cost of borrowing. A low interest rate on a loan product is great, but if that loan comes with high fees, it could end up costing more than a loan with a higher interest rate.If a loan doesn’t have any lender fees, however, then the APR and interest rate might be the same. This is often the case with credit cards.

What Does APR Stand For?

APR stands for annual percentage rate. It comes into play when you borrow money and tells you how much you will pay for a loan over the course of a year. APR is used for:
  • Credit cards
  • Loans (such as auto, personal, home, and student loans)
  • Personal lines of credit 
  • Home equity lines of credit

How APR Works

When you take out a loan, you typically need to pay back the full amount of the loan (called the principal), plus an added percentage of that amount as interest. A loan’s APR is the interest rate for a full year plus any fees, such as origination fees and application fees, that come with the loan.The APR you pay on a loan will depend on the lender, the type of loan, the size of the loan, the length of the loan, and your qualifications as a borrower (such as your credit score). 

National Average for APR

The national average for APR will depend on the type of loan. The national average for credit card APRs, for example, is currently 20.35%. The average auto loan interest rate, on the other hand, is 6.07% APR. 

Calculating APR

The formula for calculating APR is:APR = [(Fees + Interest / Principal / n) x 365] x 100In which: Fees = Any added fees, including administrative fees, origination fees, closing costs.Interest = The total interest paid over the term of the loanPrincipal =  The loan amountn =  The term (length) of the loan.This formula can help you understand how APR is calculated. However, you don't have to do any complicated math to find a loan’s APR. The Federal Truth in Lending Act requires lenders to disclose APR when they offer you credit. You can also use an online calculator to estimate a loan’s APR. If you want to calculate your monthly APR on a credit card, you would divide the APR by 12 to find your monthly periodic rate, then multiply that number by your balance.For example, if you owe $300 on your credit card for the month and your APR is 18%, you would calculate your monthly interest rate by dividing 18% by 12, which is 1.5%. You then multiple $300 by 0.015 to get $4.50. This means you’ll pay $4.50 in interest charges on your balance of $300.

What Is APY?

APY is the amount of money (or interest) you earn on a bank account over the course of one year. It’s expressed as a percentage, such as 3.00% APY. Unlike simple interest, which is the interest you earn on the money you put into the account (known as the principal), APY includes compound interest. Compound interest is, essentially, the interest you earn on the interest you’ve already earned. If you have $3,000 in a savings account and earn $3 in interest today, tomorrow you’ll earn interest on $3,003. Depending on the account, interest may be compounded daily, monthly, or annually. The greater the number of compounding periods, the greater the compound interest will be.Because it takes compounding into consideration (and different banks compound at different rates), the APY can be more useful than the interest rate for comparing deposit accounts. 

What APY Stands For

APY stands for annual percentage yield. It tells you how much interest you can earn over one year when you deposit money into an account, such as a:

How Does APY Work?

APY is the interest calculated on the money you deposited into the account, plus the interest that has been added to the account from previous periods. APY can be fixed or variable. With a savings or money market account, the APY is usually variable, which means the APY you start out with could change. It might go up or it might go down depending on the bank and the overall economy. If the Federal Reserve increases its benchmark interest rate, for example, banks may raise their APYs. If the Federal Reserve lowers rates, banks may lower their APYs.Unlike savings accounts, CDs typically offer a fixed APY.

What Is the National Average APY?

The national average APY for savings accounts as of February 2023 is 0.35%, according to the Federal Deposit Insurance Corporation (FDIC). However, high-yield savings accounts can pay as much as 25 times the national average.  

Calculating APY

Below is the mathematical formula for calculating an APY.APY = (1 + r/n)n - 1 In which:r = interest rate (expressed as a decimal)n = the compounding periods per year (if interest is compounded monthly, this would be 12; if it’s compounded daily, this would 365)While it’s helpful to know what goes into the APY calculation, the good news is that you don’t have to figure out APY on your own. The bank or credit union will typically publish an account's APY. You can also use one of the many free APY calculators available online.

How APR and APY Differ

There are a number of key differences between APR and APY. APR is the total cost of borrowing for one year. It’s shown as a percentage and does not reflect compounding interest. Understanding what APR is can help you understand which debt product is the cheapest. Look for it when comparing financial products such as credit cards, mortgages, personal loans, and auto loans.APY, on the other hand, represents what you will earn in interest over one year when you deposit money in a deposit savings account. It includes the impact of compounding and allows you to compare different savings products to find the best yield. Look for APY when comparing financial products such as high-yield savings accounts, money market accounts, and CDs.While a higher number is better with APY, a lower number is better with APR. Borrowers with strong credit histories tend to qualify for lower APRs. By contrast, credit scores have no bearing on APYs.

The Takeaway

While APR and APY are sometimes used interchangeably, they are not the same things. APR tells you what you’ll pay for a loan over the course of a year (including fees), while APY tells you what you’ll earn on your savings over the course of a year (including compound interest). Both can be either fixed or variable, depending on the type of loan or savings account. And both allow you to compare financial products apples to apples to find the best deal.If you’re looking to get the best APY on your savings, it can be helpful to use a bank comparison site that lists the APYs currently being offered by different institutions. With Lantern by SoFi’s online banking marketplace, for example, it’s fast and easy to compare high-yield savings accounts based on APY, fees, and balance minimums. Lantern can help you compare online savings accounts and find today’s best rate.

Frequently Asked Questions

Which is better APR or APY?
Why do banks use APY instead of APR?
Can APY be lower than APR?
Photo credit: iStock/designer491

About the Author

Lauren Ward

Lauren Ward

Lauren Ward is a personal finance expert with nearly a decade of experience writing online content. Her work has appeared on websites such as MSN, Time, and Bankrate. Lauren writes on a variety of personal finance topics for SoFi, including credit and banking.
Share this article: