APR vs. APY: What’s the Difference?

When you borrow money, either through a loan or a line of credit like a credit card, you’ll pay interest and other fees to the lender to cover their lending costs. APR is this total amount, or the annual percentage rate.

APR represents the cost of borrowing money annually, typically through loans or credit cards. It’s the extra money you will pay each year on that loan, like your mortgage, car payment, or credit card.

The APR for a loan or credit card considers the interest rate, fees, and other charges. APR differs from the interest rate alone, as APR includes all the fees and other costs associated with your total amount.

The “annual” part of the annual percentage rate doesn’t mean you only pay these costs on a loan or credit card once a year. Depending on the loan, you’ll most likely pay the APR monthly or have a more routine payment.

If the APR is significantly higher than the interest rate, you are paying extra fees. Aim for a low APR to minimize your out-of-pocket costs.

APR vs. interest rate

The APR and interest rate on a credit card or loan both show your cost to borrow money. However, the two percentages usually differ. That’s because APR includes the interest rate and other fees and charges.

Therefore, APR gives a more realistic view of your total cost to borrow money. Interest rates only tell part of the story.

When you have an interest-earning checking or savings account, you’ll earn money on the balance to help grow your account faster. This is expressed as the annual percentage yield, or APY.

The APY on a deposit account varies depending on market rates and other factors. The current national interest rate for a traditional savings account is 0.38%.¹ You’ll likely get a higher rate by choosing a high-yield savings account. Use a savings goal calculator to see how APY can help you reach your goals faster.

APY vs. interest rate

When you open a new savings account, you might notice that the interest rate and APY are expressed as two different percentages. APY measures how much you can earn on savings based on how often your interest rate compounds.

With compounding interest, you earn interest on the current amount in your account, which can include interest you’ve already earned.

APR tells you your cost of borrowing money, while APY tells you how much interest you can earn on your savings.

Another important detail about APY vs. APR: With APY, the bank sets interest rates based on a benchmark interest rate, like the federal funds rate. APR is often based on federal rates, but the actual rate you end up with depends largely on your credit score.

APR and APY are calculated using complex formulas that can be difficult to understand. However, knowing how they are calculated helps you understand your loan or savings account.

Calculating APR

Knowing the APR on your loan or credit card helps you better manage your budget and stay on track toward your financial goals. Lenders use the following formula to calculate APR:

• APR = ((Fees + interest Rate)/Principal loan amount)/Number of loan term days) x 365) x 100
• Written out with variables, it looks like this: APR = ((F + R)/P/N) x 365) x 100

To figure out APR using the formula above, you need to know the interest rate on the loan, the fees you’re paying, the principal balance, and the number of days in the loan term. Here’s an example loan to demonstrate how APR is calculated.

To calculate simple interest on this loan, your bank will use the formula Interest = Principal x Rate x Term. Plugging these numbers into the formula would yield the following result: 

• 10,000 (P) x 0.1 (R) x 5 (T) = 5,000.

From there, you would add together the interest and fees to equal $5,500. Then, divide by the principal amount of $10,000 to get 0.55.

Next, you would divide by the number of days in the loan term. In this case, 0.55 / 1,825 = 0.000301369863. Multiply that by 365, or the number of days in a year, to get 0.11.

The final step is to multiply this number by 100 to get a percentage. In this case, the APR on the example loan is 11%.

Calculating APY

Understanding the APY on your savings account helps you calculate your expected return based on how much money you have in the account. Calculating APY works like this:

• APY = ((1 + (interest Rate/Number of times interest is compounded yearly)) raised to the power of Number of times interest is compounded yearly) – 1
• Written out with variables, it looks like this: APY = (1 + R/N)n – 1

To determine the APY, you need to know the interest rate you’re earning and how often it compounds to see how much your money can grow. Here’s an example to show how to calculate APY.

This account has a 3% interest rate and compounds monthly. The first step is to divide the rate by the number of compounding periods, so 0.03 / 12 = 0.0025. Then, you’d add 1 to get 1.0025.

Next, you’d raise to the 12th power to get 1.030415957. Finally, you’d subtract 1 to get 0.03041595691 and multiply by 100 to get an APY on this example account of 3.04%.

You can also use an APY calculator instead of crunching the numbers yourself.

See how to keep track of your savings goals using the Chime app.

APY and APR might seem confusing at first – just remember how they affect you financially when you borrow or save.

When trying to assess how much you’ll pay to borrow or how much interest you could earn on a savings account, keep it simple. Use APR to compare loans or credit cards, and use APY to compare savings account options.