APR vs APY Explained (With 2026 Examples)
The small difference that costs or saves thousands — and how to spot which number is being quoted to you.
The One-Line Difference
APR (Annual Percentage Rate): the simple yearly interest rate, ignoring how often interest compounds. Used for loans and credit cards.
APY (Annual Percentage Yield): the effective yearly rate, including compounding. Used for savings accounts, CDs, and some investments.
APY is always equal to or higher than APR. The gap depends on how often interest compounds.
The Formula Connecting Them
APY = (1 + APR/n)^n − 1, where n = compounding periods per year.
Worked example: An account with 5% APR compounded monthly has APY = (1 + 0.05/12)^12 − 1 = 5.116%. So a "5% APR" savings account actually pays 5.116% per year.
Real 2026 Comparison Examples
| APR | Compounding | APY |
|---|---|---|
| 5.00% | Annually | 5.000% |
| 5.00% | Monthly | 5.116% |
| 5.00% | Daily | 5.127% |
| 20.00% | Daily (credit card) | 22.13% |
| 24.00% | Daily (credit card) | 27.11% |
Notice how the gap widens at higher rates. Credit cards quoted at 24% APR actually charge over 27% APY when interest compounds daily. This is why minimum payments on credit cards snowball so quickly.
Why Banks Use APR For Loans And APY For Savings
It is marketing psychology: quote whichever number makes your offer look more attractive.
- Loan APR is always the smaller number than the equivalent APY, so banks show APR.
- Savings APY is always the larger number than the equivalent APR, so banks show APY.
Legally mandated disclosures require lenders to show APR for loans (Truth in Lending Act in the US, Consumer Credit Act in the UK) so consumers can compare offers on a common metric. Similarly, Reg DD in the US requires APY disclosure on deposit accounts.
How APR and APY Differ Across Products
Credit cards: APR is quoted, but interest compounds daily. If you carry a balance, the effective APY is always several percentage points higher than the APR. Never look at just APR.
Mortgages: APR is quoted and includes fees. Interest typically compounds monthly, so APR and APY are close but not identical.
Personal loans and auto loans: APR quoted, monthly compounding. Use APR for comparison across lenders.
Savings accounts (HYSAs): APY quoted. Daily compounding in most US banks; monthly or annual in UK.
CDs / fixed-term accounts: APY quoted. US CDs typically compound daily; UK fixed-term bonds typically compound annually.
The Credit Card APR Trap
Credit cards are the most misleading product because APR is the legally required disclosure but daily compounding makes the real cost much higher.
Example: $5,000 balance at 24% APR, minimum payments only.
- Quoted APR: 24%
- Effective APY: 27.11%
- Total interest paid: $7,100+ over 15 years (minimum payments only)
The same $5,000 paid off over 12 months pays only $660 in interest. Carrying a balance is one of the most expensive financial habits — and APR disclosures don't fully convey it.
How To Compare Offers Correctly
- Loans (mortgages, personal, auto): compare on APR, which includes fees.
- Savings accounts and CDs: compare on APY, which includes compounding.
- Credit cards: if you pay in full each month, APR doesn't affect you. If you carry a balance, calculate APY for a true picture.
- Investment returns: convert to compound annual growth rate (CAGR) for multi-year comparison.
UK Equivalent Terms
UK financial products use slightly different terminology:
- APR — same meaning and use as in US, required by law on all consumer credit.
- AER (Annual Equivalent Rate) — the UK equivalent of APY, used on savings accounts.
- Gross rate — annual rate before tax deducted.
- Net rate — rate after basic rate tax (less relevant since Personal Savings Allowance introduced).
When comparing UK savings accounts, always compare AER (not gross rate if compounding differs).
The Practical Takeaway
If you are borrowing, look at APR. If you are saving, look at APY (or AER in the UK). If you are using a credit card, assume the real cost is 10–15% higher than the quoted APR once daily compounding kicks in. Banks won't volunteer this distinction — the regulators only require one metric, and banks default to whichever makes them look better.