Short answer: APR, the annual percentage rate, is the yearly cost of credit, shown on loans. For a loan with monthly payments it is the monthly rate times 12 (Reg Z, Appendix J). APY, the annual percentage yield, is what a savings or deposit account pays in a year, based on the interest rate and how often interest compounds (12 CFR 1030.2(c)). So the same nominal rate gives a higher APY than APR whenever interest compounds more than once a year.
Side by side
| APR | APY | |
|---|---|---|
| Used for | Loans and other credit (Truth in Lending, Regulation Z) | Savings, CDs and other deposit accounts (Truth in Savings, Regulation DD) |
| What it counts | The finance charge, including fees that are part of it, as a yearly rate (12 CFR 1026.22) | Interest earned over a year, including compounding (1030.2(c)) |
| How it is figured | Unit-period rate times the number of unit-periods in a year (Appendix J) | 100 x [(1 + interest / principal)365 / days in term - 1] (Appendix A) |
| Higher is | Worse for you (you pay it) | Better for you (you earn it) |
Fees in a loan's APR are covered in APR vs interest rate; this page is about compounding.
Worked examples
- A loan at 18% APR with monthly payments charges 1.5% a month: 1.5% x 12 = 18% (Appendix J). If you made no payments and the interest were added to the balance each month for a year, $10,000 would grow by (1.01512 - 1) = 19.56%, not 18% (our calculation). That is the APY-style number for the same rate.
- A savings account at 4% compounded monthly has an APY of 4.07%: $10,000 earns about $407.42 in a year. Compounded daily, the APY is 4.08% (our calculation with the Appendix A method).
- Regulation DD's own example: $30.37 of interest on a $1,000, 182-day certificate of deposit is an APY of 6.18% (Appendix A).
What to compare
- Compare loans by APR and total of payments; see how to read a loan disclosure.
- Compare savings accounts by APY, since it already counts compounding.
- A loan APR and a savings APY are figured differently. Before you weigh one against the other, put them on the same basis, for example by turning the loan rate into a yearly figure the APY way, as in the first example.
- If a lender quotes only a monthly rate or a fee, ask for the APR; see what is a good APR.
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Disclosure: Modern Lending Solutions is not a lender, loan broker or agent for any lender or loan broker, and does not make credit decisions. Any compensation we receive is paid by participating lenders, only for advertising services. This guide is general information, not financial or legal advice.
Sources
- eCFR: Regulation Z, 12 CFR 1026.22 Determination of annual percentage rate
- Regulation Z, Appendix J to Part 1026: annual percentage rate computations for closed-end credit
- Regulation DD (Truth in Savings), 12 CFR 1030.2(c): annual percentage yield
- Regulation DD, Appendix A to Part 1030: annual percentage yield calculation