APR vs. APY: What's the Difference?
If you’ve ever opened a credit card offer or savings account, you’ve probably seen these two acronyms: APR and APY.
They sound similar. They’re often used interchangeably.
But they’re not the same—and misunderstanding them can cost you money.
📊 What Is APR?
APR = Annual Percentage Rate
APR tells you how much interest you’ll pay on a loan or credit card over the course of a year.
For example:
- If a credit card has a 20% APR, that’s how much interest it charges annually (excluding compounding).
APR is about what you OWE.
It’s used in:
- Credit cards
- Auto loans
- Mortgages
- Personal loans
💰 What Is APY?
APY = Annual Percentage Yield
APY tells you how much interest you’ll EARN on savings or investments in a year—including compounding.
For example:
- A savings account with a 4% APY means you’ll earn 4% per year with compounding included.
APY is about what you GAIN.
It’s used in:
- Savings accounts
- CDs (Certificates of Deposit)
- High-yield savings
- Money market accounts
⚖️ The Key Difference
- APR does not include compounding.
- APY does.
That one detail changes the math.
If you're borrowing: you want lower APR.
If you're saving: you want higher APY.
💡 Why It Matters
APR and APY shape the flow of money in and out of your life.
- Misreading APR can lead to underestimating your debt cost
- Ignoring APY can cause you to miss opportunities for growth
Knowing the difference makes you more powerful—not just informed.
✅ Key Takeaway
APR = What You Pay
APY = What You Earn
And the gap between them? That’s where banks make money.
When you understand the difference, you stop falling for clever marketing—and start making sharper financial decisions.
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