APR vs. APY, explained without the jargon

APR and APY look like typos of each other, and banks rarely stop to explain the difference. But they measure two genuinely different things, and knowing which is which helps you compare loans and savings accounts honestly instead of being nudged by whichever number looks friendlier.

The one-sentence version

APR (annual percentage rate) is the yearly rate before compounding is counted. APY (annual percentage yield) is the yearly rate after compounding is counted. Because compounding always adds a little extra, APY is always equal to or higher than APR at the same stated rate.

What compounding has to do with it

Compounding means earning (or paying) interest on interest. If a savings account pays 5% but credits interest monthly, each month's interest starts earning its own interest for the rest of the year. Add that up and your effective return is slightly more than 5%. APY captures that "slightly more"; APR does not.

A quick example: a 12% APR compounded monthly works out to about 12.68% APY. Same underlying rate, but the APY reflects what you actually end up with after a year of monthly compounding.

Which number appears where

Here's the pattern worth memorizing, because it explains why each industry quotes the number it does:

• Loans and credit cards quote APR. Lenders are required to disclose APR because it's meant to represent the yearly cost of borrowing, including certain fees. Note that a credit card's effective cost is closer to its APY, since card interest compounds — one reason carrying a balance is so expensive.
• Savings accounts and CDs quote APY. Banks advertise APY because, being the higher number, it makes the return look as attractive as possible — and because it's the honest measure of what you'll actually earn.

The takeaway: when you compare two products, make sure you're comparing the same measure. Two savings accounts advertised at "5%" can differ if one means APR and the other APY, and comparing a loan's APR to a savings account's APY is apples to oranges.

Why this matters for your planning

When you use our savings goal planner, it asks for APY because that's the figure that reflects real growth on a savings account. Our loan calculator asks for APR because that's how loans are quoted. Using the right input for each keeps your projections accurate.

One more practical note: fees can make a loan's true cost higher than its APR suggests, and promotional "teaser" savings rates can expire. Always read the fine print alongside the headline percentage.

The bottom line

APR is the rate before compounding; APY is the rate after. Loans quote APR, savings quote APY, and APY is always the higher of the two. Once you know that, the acronyms stop being intimidating and start being useful — a quick way to tell whether a number is showing you the whole picture or just the friendly half of it.