Guide to APY vs APR

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 may pay when you borrow money. APY stands for annual percentage yield. It tells you the amount of interest you might earn when you save money.

Whether you're looking to borrow or save, understanding the difference between APR vs. APY could 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 could 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 includes the interest 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 depends on the type of loan. The national average for credit card APRs, for example, is currently 19.25% (September 2026). The average auto loan interest rate, on the other hand, was 6.35% APR for new cars in the second quarter of 2026. 

Calculating APR

The formula for calculating APR is:

APR = [((Fees + Interest) / Principal) / n] x 365 x 100

In which: 

Fees = Any added fees, including administrative fees, origination fees, and closing costs

Interest = The total interest paid over the term of the loan

Principal = The loan amount

n = The term (length) of the loan, in days

This formula might 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 could also use an online calculator to estimate a loan’s APR. 

If you wanted 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 18.00%, you could calculate your monthly interest rate by dividing 18.00% by 12, which is 1.50%. You then multiply $300 by 0.015 to get $4.50. This means you 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 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.

Because it takes compounding into consideration (and different banks compound at different rates), the APY might be more useful than the interest rate for comparing deposit accounts. 

Recommended: What Is Compound Interest?

What APY Stands For

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

• Savings account

• Money market account 

• Certificate of deposit (CD)

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 might 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 August 2026 is 0.38%, according to the Federal Deposit Insurance Corporation (FDIC). However, high-yield savings accounts may pay as much as 11 times the national average.^,  

Calculating APY

Below is the mathematical formula for calculating an APY.

APY = [1 + (r / n)]ⁿ - 1 

In which:

r = The interest rate (expressed as a decimal)

n = The compounding periods per year (if interest is compounded monthly, this would be 12, and if it’s compounded daily, this would be 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 typically publishes an account's APY. You might also use one of the many 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 may 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 could earn in interest over one year when you deposit money in a 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 sound similar, they are not used interchangeably. APR tells you what you might pay for a loan over the course of a year (including fees), while APY tells you what you could earn on your savings over the course of a year (including compound interest). Both may be either fixed or variable, 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, 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.