APY vs. APR, and Why It Matters

The short version

APY stands for annual percentage yield. It is what you earn in a year on savings, including compounding. APR stands for annual percentage rate. It is the yearly cost to borrow, including certain fees.

Here is the whole rule. Want a higher APY when you save. Want a lower APR when you borrow. Same idea, two opposite sides.

APY you grow, APR you shrink

Two rates, two jobs. One measures what you earn on savings. The other measures what you pay to borrow. Compare each one only against its own kind.

APY, what you earn

• Includes compounding.
• Higher is better for you.
• For savings, money markets, and CDs.
• Compare APY to APY.

APR, what you pay

• Interest plus certain fees.
• Lower is better for you.
• For loans and credit cards.
• Compare APR to APR.

The same percentage helps you or hurts you, depending on the side.

Source: CFPB

Do this now

1. When you save, compare accounts APY to APY. That is the honest number for what you earn.
2. When you borrow, compare offers APR to APR. That is the honest number for what you pay.
3. Check whether an APR is fixed or variable. A variable APR can move up later.
4. If a covered loan quotes over 36 percent MAPR, take it to JAG or Military OneSource. Something is off.

What APY means

APY is the annual percentage yield. It tells you the total interest you earn on a deposit in a year, and it counts compounding, which is interest earning more interest. Because it includes compounding, APY is a little higher than the plain interest rate on the same account. The Truth in Savings Act makes banks and credit unions disclose APY, so you can compare savings accounts, money market accounts, and CDs on equal footing.

What APR means

APR is the annual percentage rate. It is the yearly cost to borrow, written as a percentage. APR is the interest rate plus certain fees, so it can be higher than the quoted interest rate on a loan. On most credit cards, the purchase APR and the interest rate are the same number. Lenders must show the APR before you sign, so you can compare loans side by side.

Why the difference matters

The split is direction. One rate you want to grow, the APY on your savings. One rate you want to shrink, the APR on your debt. A higher APY on an emergency fund helps you. A higher APR on a car loan or a payday product costs you every month. So check which side you are on before you decide if a bigger number is good or bad. This matters even more in uniform.

If a quoted rate tops 36%, something is off

High-cost lenders cluster near bases for a reason. Knowing the rate, and your protection, keeps a routine purchase from costing you months of pay.

36%

the Military Lending Act caps the Military APR (MAPR) on most consumer loans to active-duty members and covered dependents.

Read the rate

• Payday and near-base lenders can carry very high APRs.
• A few points of APY adds up over a deployment.
• Check whether an APR is fixed or variable.
• Over 36 percent? bring it to JAG or Military OneSource.

Read the APR before you borrow.

Source: CFPB

Get help, free

You do not have to sort this out alone. Every active-duty, Guard, and reserve member, and their family, can talk with a free Personal Financial Counselor about rates and borrowing. Reach a counselor through Military OneSource, your installation Personal Financial Manager, or the DoD Office of Financial Readiness (FINRED). For plain answers on accounts and rates, use Ask CFPB. To learn how deposit accounts and insurance work, see the FDIC Consumer Resource Center. The links are in Sources below.

FAQ

Is a higher number better?

It depends on the side. A higher APY on savings is good for you. A higher APR on a loan costs you more.

Why is APR sometimes higher than the interest rate?

Because APR can include certain fees on top of the interest rate.

Do credit cards show APY?

No. Cards quote APR. On most cards you can avoid interest on purchases by paying the statement balance in full by the due date.

Sources & links

• CFPB, Regulation DD (Truth in Savings Act), Appendix A: Annual Percentage Yield Calculation: consumerfinance.gov
• CFPB, What is a credit card interest rate? What does APR mean?: consumerfinance.gov
• CFPB, What is the difference between a loan interest rate and the APR?: consumerfinance.gov
• CFPB, What is the difference between a fixed APR and a variable APR?: consumerfinance.gov
• CFPB, What are my rights under the Military Lending Act?: consumerfinance.gov
• Military OneSource, free financial counseling: militaryonesource.mil