Quick answer
APR (annual percentage rate) is the yearly cost of credit, including the interest rate plus certain fees[2]. APY (annual percentage yield) is what a savings account pays over a year once compounding is counted[3]. Use APR to compare loans and APY to compare savings.
Key points
- APR is a borrowing number: the interest rate plus fees charged when the loan is made, expressed per year.
- APY is a savings number: it includes the effect of compounding, so it is equal to or higher than the plain interest rate.
- On US credit cards, APR is the periodic rate multiplied by the number of periods, so it does not show compounding.
- A 24% card APR charged monthly works out to about 26.8% a year if the balance is never paid down, computed with code.
- In the UK, an advertised 'representative APR' only has to apply to at least 51% of the agreements expected from the advert.
On this page
#Why are there two different annual rates?
Interest is the price of money. When you borrow, you pay it; when you save, you earn it. Lawmakers wanted people to compare offers fairly, so they created standard yearly measures. In the US, the annual percentage rate (APR) comes from the Truth in Lending Act and its Regulation Z, and the annual percentage yield (APY) comes from the Truth in Savings Act and its Regulation DD. Both turn a deal into one yearly percentage, but they are built differently and answer different questions. Short definitions sit in our glossary entry for APR.
#What does APR measure on a loan?
Regulation Z defines the APR as a measure of the cost of credit, expressed as a yearly rate, that relates the amount and timing of what you receive to the amount and timing of what you pay back[1]. In everyday terms, the CFPB explains that the APR is the interest rate plus additional fees charged by the lender, such as origination charges and other fees charged when the loan is made[2]. That is why two loans with the same interest rate can have different APRs: the one with higher upfront fees has the higher APR.
Accuracy is regulated too. For a regular loan, a disclosed APR counts as accurate if it is within one-eighth of one percentage point above or below the correctly calculated rate; for irregular loans the tolerance is one-quarter of a point[1].
Worked example
Worked example: how a fee raises the APR
A 3-year loan of $10,000 at an 8% interest rate, repaid monthly, with a $300 origination fee deducted from the money you receive. The lender's monthly payment is based on the full $10,000, but you only get $9,700. All figures computed with code; this is a simplified illustration of the method, not a lender quote.
- Monthly payment on $10,000 at 8% for 36 months
- $313.36
- Total of 36 payments
- $11,280.96
- Interest alone
- $1,280.96
- Money actually received
- $9,700
- APR that matches $9,700 received to 36 × $313.36 paid
- about 10.08%
#What does APY measure on savings?
Regulation DD defines APY as a percentage rate reflecting the total amount of interest paid on an account, based on the interest rate and the frequency of compounding for a 365-day period[3]. Compounding means that interest, once added to your balance, starts earning interest itself. The more often interest is added, the more the APY rises above the plain interest rate. Regulation DD defines the interest rate, by contrast, as the annual rate paid on an account that does not reflect compounding[3].
The regulation even gives the formula. For a term that is not exactly a year, APY = 100 × [(1 + interest ÷ principal)^(365 ÷ days in term) − 1][4]. Its own example: a six-month certificate of deposit that pays $30.37 on $1,000 over 182 days has an APY of 6.18%[4]. We reran that calculation in code and got 6.18%, which shows how the formula scales half a year of interest up to a full year with compounding.
| Question | APR | APY |
|---|---|---|
| Used for | Loans and credit cards | Savings and deposit accounts |
| US rule | Regulation Z (Truth in Lending)[1] | Regulation DD (Truth in Savings)[3] |
| Includes fees? | Certain finance charges such as origination fees[2] | No; it reflects interest paid |
| Includes compounding? | Not on credit cards: periodic rate × periods[5] | Yes, for a 365-day period[3] |
| Higher is better for you? | No, lower is cheaper | Yes, higher earns more |
#Why can a credit card cost more than its APR?
Here is the trap. For credit cards and other open-end credit, Regulation Z says the APR is computed by multiplying each periodic rate by the number of periods in a year[5]. A card charging 2% a month is disclosed as 24% APR. But if you carry a balance and unpaid interest is added to it each month, you pay interest on interest, just like compounding in a savings account, only working against you. The APR is a fair comparison tool between cards; it is not a full measure of what a revolving balance costs over a year.
Worked example
Worked example: same rate, two ways to show it
Two calculations side by side, both computed with code. Real cards often use a daily rate and have fees and grace periods, so treat these as illustrations of the maths.
- Savings at 4.00% interest, compounded monthly
- APY ≈ 4.07%
- Savings at 4.00% interest, compounded daily
- APY ≈ 4.08%
- Card at 24% APR = 2% per month
- Effective yearly cost ≈ 26.82% if interest compounds monthly all year
- Card at 24% APR as a daily rate
- 24 ÷ 365 ≈ 0.0658% per day
#What is a 'representative APR' in UK adverts?
In the UK, credit adverts often show a representative APR. The FCA Handbook defines it as an APR at or below which the firm reasonably expects that credit will be provided under at least 51% of the agreements that will result from the promotion[7]. Put simply, just over half of successful applicants should get that rate or better, and the rest may be offered more. Your personal APR depends on your circumstances, including your credit score.
#How do you compare offers using APR and APY?
A quick comparison routine
Match like with like
Compare loans of the same amount and term, or savings with the same access rules.
For borrowing, use APR
It folds fees into one number; the lower APR is cheaper for the same amount and term.
For saving, use APY
It already counts compounding; the higher APY earns more if the rate stays the same.
Check the total
Ask for the total amount you will repay or earn in currency, and test it with our loan payment calculator or APR to APY converter.
Common beginner mistakes with APR and APY
Comparing a loan's APR with a savings APY
They are built differently; a 5% APR loan and a 5% APY account do not cancel out.
Using the interest rate instead of the APR
The interest rate leaves out fees, so a 'low rate' loan with large fees can be the more expensive one.
Assuming card APR is the yearly cost
On a revolving balance, interest on interest pushes the real yearly cost above the APR.
Treating a representative APR as your rate
In the UK it only has to apply to at least 51% of expected agreements; you may be offered a higher one.
#What do typical credit card APRs look like today?
The Federal Reserve publishes average rates in its G.19 consumer credit release. In the release of 8 September 2026, the average interest rate on commercial bank credit card plans in the second quarter of 2026 was 20.94% for all accounts and 22.15% for accounts that were charged interest[6]. Those are averages; individual offers vary widely with the card and the borrower. For how card payments are processed behind the scenes, see how card payments work.
The bottom line
APR is the borrower's comparison number and APY is the saver's. APR adds certain fees to interest; APY adds the effect of compounding. On credit cards, the APR leaves out compounding, so a balance you carry for a year costs more than the headline rate suggests.
Frequently asked questions
Is APR or APY higher?
For the same nominal rate with compounding, APY is higher than the plain rate. APR on a credit card does not include compounding[5], so the true yearly cost of a carried balance can exceed it.
Does APR include all fees?
It includes the interest rate plus finance charges such as origination fees charged when the loan is made[2], but not every possible fee, for example late fees you may or may not incur.
Why do savings accounts show APY instead of APR?
US Regulation DD requires an APY that reflects interest and compounding over 365 days so savers can compare accounts[3].
What is a representative APR?
A UK advertising rate that the firm expects at least 51% of agreements from the promotion to get at or below[7].
Sources
- 12 CFR 1026.22 — Determination of annual percentage rate — eCFR (US Code of Federal Regulations), 2026 Primary
- What is the difference between a loan interest rate and the APR? — Consumer Financial Protection Bureau, 2026 Primary
- 12 CFR 1030.2 — Definitions (Regulation DD) — eCFR (US Code of Federal Regulations), 2026 Primary
- Appendix A to Part 1030 — Annual Percentage Yield Calculation — eCFR (US Code of Federal Regulations), 2026 Primary
- 12 CFR 1026.14 — Determination of annual percentage rate (open-end credit) — eCFR (US Code of Federal Regulations), 2026 Primary
- Consumer Credit — G.19 (release of 8 September 2026) — Board of Governors of the Federal Reserve System, 2026 Primary
- FCA Handbook Glossary: representative APR — Financial Conduct Authority Primary
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