What’s the Difference Between an APY and APR?

The difference between APR and APY is quite simple. An APY is the interest rate return you receive when you lend out money and an APR is the interest rate you pay when you borrow money.

What’s an APY?

An APY is the interest rate you accrue when lending money through a savings product or accrue interest through any other “deposits” loaned out. So, an APY, is the interest rate you accrue. Consumers typically earn interest from savings account, although the APY isn’t as high as what you pay when you borrow. If you have $10,000 in a bank savings account with a 0.25% APY, you will earn $25 in interest every year.

What’s an APR?

On the other hand, an APR is the money you pay to borrow, i.e. the effective interest rate when you take out a loan. So, if you borrow $10,000 with an APR of 10%, you will pay approximately $1,000 in interest payments every year.

Comparing Borrowing Products

Whenever you compare borrowing products you want to make sure you are looking at a constant in regards to the APR. For example, if you are comparing two different credit cards you’ll want to make sure you are making an apples to apples comparison. In this scenario that would mean comparing APRs. However, there are other things you should be mindful of when comparing borrowing or lending products, make sure you’re on the lookout for origination costs and fees, since these will really eat into the loan amount and will subtract from the bottom line in your comparison. Consumers should also keep in mind that there can be many other associated fees when shopping for a loan, so APR is not the only thing you should pay attention too! It's also important to consider the pros and cons of high yield saving accounts.

The main difference can be attributed to whether you are “borrowing” or “lending”. An APY is a yield, because it’s what you earn when you lend or deposit money into a bank. An APR is the opposite, because its what’s you pay for borrowing money. Although they are easy to confuse, they really are basically the same thing! They are just used in two different scenarios, borrowing and lending.