APR vs. APY: What Are The Differences?

What we’ll cover:

• Savings accounts generally include APY, which represents the interest rate plus the power that compounding could have on your savings over the course of a year
• When you borrow money, you’ll typically see the APR, which represents the cost of borrowing money
• When you take out a loan, the APR summarizes the interest, upfront costs and fees you’ll pay over the course of the year
• When you borrow using credit, the APR is the interest rate you are charged on purchases not paid in full by the statement balance due date
• Learn how to calculate both APY and APR in this article 

If you’ve worked with a bank to borrow money, to save more, or to do a little of both, you’ve probably tangled with interest in some form or fashion. But the experience if you’re borrowing or saving is a little different.

When you drop money into a deposit account, like a savings account, money market account or certificate of deposit (CD), you may see the account APY in various places, or, at the very least, on the promotional information for these bank accounts.

But, when you’re borrowing money, interest is calculated a little differently and loan and credit statements include APRs instead of APYs.

If it’s all interest, shouldn’t the measurements be the same? You’d think so, but APY applies when you’re saving money (think savings accounts, CDs, money market accounts) and APR pops up when you’re borrowing money. We dive into the details here, that is, if you’re interested in learning more.

Interest: Why it exists 

When you open a savings account, you expect banks to offer a little something in return for leaving your money with them. Banks do this because they then turn around and use that money (your money) to, amongst other things, offer loans at a rate that’s higher than what they’re offering savings customers. 

When you take out a loan (including credit cards), things work in reverse. Instead of banks courting your deposits by offering interest so they can turn around and lend it, now borrowers are the ones seeking some financial support. And that financial support comes with a price – interest – in addition to the money that’s being borrowed. It’s a key way lenders earn money by loaning money.

What is Annual Percentage Yield (APY)?

Savings accounts generally tout an annual percentage yield (APY) instead of an interest rate. If you see the APY and interest rate side by side, you’ll notice the APY is usually slightly higher. This is because APY represents the interest rate in addition to the impact compounding can have on your savings over the course of a year. Compounding adds interest you’ve earned to the balance, and the interest rate applies to the bigger balance.  

Keep in mind that the APY is a general guideline because if you’ve got a deposit account with a variable interest rate you could earn more interest if the rate rises during the year, and a little less if it drops.

For example, if you know that you will earn a 2.23% interest rate and your account compounds interest daily, like at Marcus, you can get the following:

• APY=(1+.0223/365)^365-1=2.25%
  

What is behind the Annual Percentage Rate (APR)?

If you’re borrowing money from someone other than your parents or best friend, like a financial institution, you can expect to pay interest on top of the money you’re borrowing. To ballpark what that loan will cost once you’ve finished paying it off, you’ll want to look at the Annual Percentage Rate (APR).  

But what goes into that calculation depends on how you’re borrowing the money, because APRs are calculated differently for loans and credit cards.

When you take out a loan

The APR summarizes the interest, upfront costs and fees you’ll pay over the course of the year. This summary is expressed as a percentage of the amount borrowed.

Comparing APRs could help you compare loans because they provide a shared baseline – they represent the rate and any upfront fees you’ll pay. There are many factors that go into determining the APR a lender may offer you, however one of the first things you'll want to check is your credit score. 

Generally, the higher your credit score, the lower the APR will be.

You’ll also want to read a loan’s fine print to make your decision, but looking at the APR is generally considered a good filter when you’re assessing your options.

For this formula you’ll need to subtract any fees from the loan amount. You’ll also have to multiply the rate by 12 to get the actual annual percentage rate. 

Here is what the monthly payment would be in our example:

• =RATE (60,-1062.35,49700,0)*12
• The result is 10.26%