APR (Annual Percentage Rate) and APY (Annual Percentage Yield) both describe an interest rate over a year, but they answer slightly different questions — and mixing them up leads to comparing offers incorrectly, whether you're borrowing or saving.
The core difference: compounding
APR is the simple annual rate, without factoring in how often interest compounds within the year. APY includes the effect of compounding, so it reflects what you'd actually earn (on savings) or owe (on some loans) if interest is added back to the balance multiple times a year rather than once.
A 6% APR compounded monthly produces an APY of about 6.17%, because each month's interest starts earning its own interest for the rest of the year. The more frequently interest compounds, the bigger that gap grows between the quoted APR and the effective APY.
Which one to use when
For savings and investment products, APY is the more honest number to compare, since it reflects what you'll actually earn including compounding. For loans, APR is the standard comparison figure and — importantly — often includes certain fees folded into an effective rate, which is why a loan's APR can be higher than its stated interest rate alone.
When comparing two savings accounts, always compare APY to APY, not one account's APR to another's APY — the latter comparison can make a worse account look better than it is. Our compound interest calculator lets you plug in a rate and see the real year-by-year effect for yourself.