APR vs APY: The Difference That Costs You Money
Two rates, two purposes
APR (Annual Percentage Rate) is a simple annual quote. APY (Annual Percentage Yield) folds in the effect of compounding. On a loan with monthly compounding, a 12% APR is actually a 12.68% APY.
Where the gap matters most
Credit cards. A 24% APR compounded daily becomes a 27.1% APY. On a $5,000 balance that's an extra $155 a year for the same headline rate.
Comparing offers
Two banks quote you the same 4.5% APY savings account. One compounds daily, one monthly. The daily-compounding APR is 4.401%, the monthly is 4.409% — nearly identical because APY normalizes them.
The takeaway
For savings, compare APY. For loans, compare APY too — and be suspicious when a lender leads with APR only.
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