You'll see and everywhere in finance. They both involve rates, but they're used in opposite situations.
APY: Annual Percentage Yield
Used for: Money you EARN (savings, investments)
APY tells you the real return on your money, including . It's what savings accounts, CDs, and high-yield savings accounts advertise.
A 5% APY means if you deposit $1,000, you'll have $1,050 after one year (assuming you don't touch it).
Higher APY = More money for you
APR: Annual Percentage Rate
Used for: Money you BORROW (loans, credit cards)
APR tells you the cost of borrowing, including fees. It's what credit cards, mortgages, and car loans advertise.
A 20% APR on a means you'll pay roughly $200 in interest per year on a $1,000 balance.
Lower APR = Less money you pay
The Key Difference
| APY | APR | |
|---|---|---|
| Used for | Savings | Borrowing |
| You want | Higher | Lower |
| Includes | Compound interest | Fees |
Real World Examples
Savings account shopping:
- Bank A offers 0.01% APY (typical big bank)
- Bank B offers 5.00% APY ()
- On $10,000: Bank A pays $1/year, Bank B pays $500/year
Credit card comparison:
- Card A has 15% APR
- Card B has 25% APR
- On $5,000 balance: Card A costs $750/year, Card B costs $1,250/year
Quick Memory Trick
- APY = Yield = What you Yearn (earn)
- APR = Rate = What you get Rated (charged)