APR vs. APY: What’s the Difference?
Annual percentage rate (APR) and annual percentage yield (APY) are finance terms that describe how interest accrues, but they don’t mean the same thing. APR represents the yearly borrowing cost of loans or lines of credit, while APY measures how much interest you could earn from savings or investments.
Understanding the difference between APR vs. APY can help you make more informed decisions about your money.
Key Points
• APR is the annual cost of borrowing, including interest and fees.
• APY measures interest earned on savings, considering compounding.
• APR applies to loans and credit cards; APY to savings and some investments.
• Compounding frequency influences APY, with more frequent compounding yielding higher returns.
• Understanding APR and APY aids in informing financial decisions on borrowing and saving.
Understanding APR (Annual Percentage Rate)
APR, in simple terms, is the cost you pay to borrow money over time, or per year. When you apply for a loan, credit card, or line of credit, the APR is an important consideration. The APR on a loan is expressed as a percentage.
Definition and Components
The Consumer Financial Protection Bureau (CFPB) defines APR as “a measure of the interest rate plus the additional fees charged with the loan.” A higher APR means a more expensive loan.
In relation to APR, an interest rate is the cost you pay to the lender to borrow on a loan or line of credit. It’s also expressed as a percentage.
APR is an annualized rate, meaning it measures the cost of borrowing yearly based on two factors:
• Your interest rate
• Fees
When thinking about APRs, you may wonder what a good interest rate on a loan is. The short answer is it’s probably the lowest rate you can get, based on your credit score and other qualifications. That rate will also vary depending on economic and global forces (for example, rates were slashed during the COVID pandemic to stimulate borrowing).
Fees included in APR can vary by loan type and lender. A personal loan, for instance, may have an origination fee while a mortgage loan may include discount points, which are fees you pay to buy down your interest rate. If there are no fees involved, there’s no difference between the APR vs. interest rate.
How APR Is Calculated
APR is calculated using a set formula, which looks like this:
APR = [((Interest charges + fees) ÷ Loan principal amount) ÷ Number of days in loan term x 365] x 100
You may also see it simplified this way:
APR = (Periodic interest rate x 365) x 100
In the second formula, the periodic interest rate represents the sum of the interest and fees divided by the loan amount, which is then divided by the number of days in the loan term.
Here’s an example of how to calculate APR for a $10,000 loan, assuming a 12% interest rate, a 2% origination fee, and a four-year term.
• First, calculate simple interest on the loan by multiplying the loan principal by the interest rate by the loan term: $10,000 x 0.12 x 4 = $4,800
• Next, calculate the origination fee ($10,000 x 0.02), and add it to the interest charges: $4,800 + $200 = $5,000
• Divide this sum by the principal: $5,000 / $10,000 = 0.5
• Divide the result by the number of days in the loan term, then multiply by 365: 0.5 / 1,460 x 365 = 0.125
• Multiply the result by 100 to get the APR: 0.125 x 100 = 12.5%
That’s quite a bit of work, but you can do it if you have all the numbers. If you’d like to make calculating APR easier, you can use an online calculator instead.
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Understanding APY (Annual Percentage Yield)
To understand APY vs. APR, you have to shift your perspective from borrowing money to saving it. APY measures how much interest you can earn on your money when you deposit it in a savings account or other vehicle, rather than what you pay to a lender.
Definition and Purpose
The CFPB defines APY as a measurement of “the total amount of interest paid on an account based on the interest rate and the frequency of compounding.”
When you’re saving money, the APY tells you how much your money may grow. The higher the APY, the more interest you could earn on your savings over time.
Calculation Method for APY
If you’re wondering how to calculate APY, you’ll use a formula that’s different from the one for APR. Here’s how it works.
APY = 100 [(1 + Interest/Principal)(365/Days in term) − 1]
You may also see this simplified as in a formula with r representing the nominal rate offered by the institution, while n is how often the interest compounds:
APY = (1 + r/n)ⁿ – 1
The frequency of compounding matters for APY calculations. Compounding happens when you earn interest on your interest and it gets added to the principal, which can help accelerate your money making you money. Say, for example, you deposit $10,000 into a CD with a 5% interest rate. The CD has a 12-month term.
If interest compounds…
• Annually, the APY would be 5.00% and you’d end up with $10,500 at the end of the CD term.
• Monthly, your APY works out to 5.116% and you’d have $10,511.62 when the CD matures.
• Daily, the APY is 5.127% and your savings would grow to $10,512.67.
Is there a huge difference in the numbers? Not really. But these examples show how a frequency shift can affect your money’s growth potential. When you are talking about money that is on deposit for years or decades, the frequency of compounding interest on savings accounts can have a more significant impact.
If you don’t have time to do the math yourself, you can use an APY calculator to run the numbers.
Key Differences Between APR and APY
The APR vs. APY difference comes down to how they’re calculated, how they’re used, and what they tell you. Here’s a side-by-side comparison of the two that can make the differences clearer.
| APR | APY |
|---|---|
| Measures the cost you pay to borrow money | Measures the interest you could earn when you save or invest money |
| Associated with loans, credit cards, and lines of credit | Associated with savings accounts, CD accounts, and some checking accounts and investments |
| Does not factor in compound interest | Does factor in compound interest |
| When paying an APR, a lower number is better | When earning an APY, a higher number is better |
When APR Is Used
Broadly speaking, you’ll run into APR any time you plan to borrow money. Here are some examples of products that can have an APR.
Loan Products
Loans allow you to borrow money, usually in a lump sum, and pay it back with interest and fees. Some of the loans that will have an APR include:
• Mortgage loans, including home equity loans or reverse mortgages
• Auto loans
• Small business loans
• Student loans
• Personal and business lines of credit
One thing to note is that loan APRs may be fixed or variable. A fixed-rate APR means your loan rate won’t change. Variable APR loans, on the other hand, have rates that are attached to an underlying benchmark or index and will vary along with its fluctuations.
If the benchmark rate increases or decreases, your loan APR can also shift. That means your loan rate (and consequently your monthly payment) can change over time. An example of how benchmark rates can fluctuate over time: The highest Fed fund rate was 20% in March 1980 and the lowest was 0.00 to 0.25% from December 2008 to December of 2015 and again during phases of the Covid pandemic.
Credit Cards
Credit cards typically have an APR, and some cards have more than one. For example, your card agreement might specify a:
• Purchase APR, which applies to purchases you charge to your card
• Balance transfer APR, if your card accepts balance transfers
• Cash advance APR, if your card allows you to withdraw cash from your credit limit
• Penalty APR, which may apply if you violate the terms of your card agreement
If your card has multiple APRs for different transaction types, they might all be different. For example, your purchase APR might be 19.99% while your cash advance APR could be 29.99%.
Credit card companies may offer low introductory APRs to entice you to open an account. For example, you might be offered a 0% APR on purchases and balance transfers for the first 12 months or a somewhat longer period.
Introductory offers can save money on interest, but it’s important to know when the promotional rate expires, which charges it applies to, and what the regular APR will be. Also, keep in mind that credit card APRs are most often variable and your credit card company can change your rate at any time as long as they give you proper notice first.
When APY Is Used
When you shift from talking about borrowing money to saving money, the key metric will be APY instead of APR. Here are some examples of when you’d need to know the APY you’re earning.
Savings Accounts
Savings accounts are designed to hold money that you don’t plan to spend right away. Banks and credit unions can offer different types of savings accounts, including:
• Traditional savings accounts
• Money market savings accounts
• Certificate of deposit, or CD, accounts
Each of these types of savings accounts can earn interest, though it’s up to banks to determine what APY to offer.
Except for most CDs (which are likely fixed-rate), savings account rates are subject to change. So the APY you earn on day one after opening your account may be higher or lower than the APY you earn on day 100 or 1,000. With CDs, your APY is usually locked in for a set period until the CD matures.
Investment Products
While investments typically offer potential profit through dividend payments and/or capital gains, there are a few cases where you might see APYs mentioned:
• Annuities are insurance contracts that you purchase for a premium and receive payments from later on. These investment vehicles are designed to provide you with supplemental income in retirement. Fixed annuities can offer what is called either a payout rate or APY rate, which is likely similar to what you’d get with a CD, allowing for predictable growth.
• Brokered CDs work like regular bank CDs, with a twist. You buy them through a brokerage, and they can offer potentially higher rates of return. For example, a 12-month bank CD might have a 4.50% APY while a 12-month brokered CD might offer 5.25% instead. That’s typically because they reflect a more competitive market, with the broker having invested a larger sum in CDs that earns a higher APY, which they then pass along to those who buy smaller increments.
• Cash management accounts are another option. These are checking accounts offered at brokerages that can earn interest like a savings account. Some cash management accounts offer an APY that’s comparable with the top high-yield savings account rates.
Impact on Financial Decisions
Knowing the difference between APR vs. APY can help you build your financial literacy and make smarter choices with your money.
For example, say that you’re planning to buy a new car. You have $20,000 in a high-yield savings account that’s earning a 4.50% APY compounded monthly. You’re thinking about buying a car for $20,000 and you’ve been preapproved for a three-year car loan at 7%.
You’re debating whether to finance the whole amount, use half of your savings for a down payment and finance the rest, or use all your savings to buy the car outright. Here, it would help to know:
• How much interest you’d pay on the loan in each scenario
• How much interest you’d earn on your savings in each scenario
For example, take a look at how these scenarios could play out:
1. Say you use all your savings to buy a car. You won’t pay any interest since you won’t have a car loan. However, you won’t earn any interest either since your savings balance is $0.
2. What if you go half and half? Assuming you take the full three years to pay off the loan, you’d pay around $1,116 in interest. If you don’t add anything to the $10,000 you have left in savings and you maintain the same 4.50% APY over the three years, by calculating savings account interest, you’d see that you’d earn about $1,442. By doing the math of $1,445 minus $1,116, you’d come out $329 richer.
3. If you keep your savings in the bank and finance the whole amount (in reality, you’d likely need to make a down payment, however), you’d pay $2,232 in interest on the loan and earn $2,885 on your savings. So you would net $653.
These examples assume you don’t refinance your car loan at any point or add anything to savings, and that your savings APY stays the same. But they offer insight into how APR and APY affect you financially.
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The Takeaway
The difference between APY vs. APR is important since they express two different financial rates. An annual percentage yield, or APY, reflects the interest you can earn on savings and other funds, while the annual percentage rate, or APR, communicates what it will cost you to borrow money.
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Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.
FAQs
Which is typically higher, APR or APY?
APR tends to be higher if you’re comparing loans or credit card rates to savings account rates. As of late 2024, it’s common to find credit cards with APRs in the 20% or higher range but high-yield savings account APYs are typically in the 4.00% to 5.00% range.
Why do banks use APY for savings accounts and APR for loans?
Banks use APY for savings accounts and APR for loans because they measure two different things. When you open a savings account, the bank pays interest to you. The APY tells you how much you could earn per year, with compounding taken into effect. When you get a loan or line of credit, you pay interest to the bank. The APR tells you how much the bank charges for you to borrow, with fees included.
How does compound interest affect APY?
Compounding affects APY based on frequency. The more often interest accrues and gets added to the principal (say, weekly vs. monthly), the more interest you can earn over time, and the higher the APY will be. Using an online calculator can give you an idea of how much interest you could earn from a savings account.
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SoFi members with direct deposit activity can earn 3.80% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.
As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 3.80% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.
SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 3.80% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.
SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.
Separately, SoFi members who enroll in SoFi Plus by paying the SoFi Plus Subscription Fee every 30 days can also earn 3.80% APY on savings balances (including Vaults) and 0.50% APY on checking balances. For additional details, see the SoFi Plus Terms and Conditions at https://www.sofi.com/terms-of-use/#plus.
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