APY (Annual Percentage Yield) measures what you earn on deposits — it includes compounding, so it's higher than the stated rate. APR (Annual Percentage Rate) measures what you pay on debt — it includes fees but typically excludes compounding. When you save, look at APY. When you borrow, look at APR.
APY and APR are both annual rate disclosures, but they measure entirely different things. APY (Annual Percentage Yield) tells you what your money earns in a deposit account over one year, after compounding. APR (Annual Percentage Rate) tells you the cost of borrowing — it captures interest plus certain fees expressed as a yearly rate. Federal law requires both to be disclosed, but they apply to opposite sides of a financial transaction.
When you deposit money into a savings account, money market account, or CD, the bank quotes an APY. APY includes the effect of compounding — the more frequently interest is added to your balance, the more you earn. A 4.00% nominal rate compounded daily produces an APY slightly above 4.00%, because each day's interest earns interest on subsequent days. The CFPB's Regulation DD rules require banks to disclose APY on deposit products so consumers can compare accounts on equal terms. Rule of thumb: higher APY = more money earned.
When you take out a loan or open a credit card, the lender quotes an APR. APR captures the interest rate plus mandatory fees (origination fees, certain closing costs) expressed as a yearly percentage. It is not the same as your monthly payment rate multiplied by 12, because APR folds in fees that a simple interest rate doesn't show. The CFPB's Truth in Lending disclosures (Regulation Z) require lenders to disclose APR on loan agreements and credit card terms. Rule of thumb: lower APR = less you pay to borrow.
On loans, lenders quote APR — which does not incorporate compounding of the interest charges themselves (you're paying down the balance over time). On savings accounts, banks quote APY — which does incorporate compounding (your balance grows and earns interest on interest). This asymmetry is intentional: APR simplifies the cost of borrowing into a single comparable number; APY amplifies the displayed return to accurately reflect what a depositor actually earns over a year. The FDIC's national rate data is published in APY for savings products.
Savings account: 4.00% nominal rate, compounded daily → APY = 4.08%. You deposit $10,000; you earn approximately $408 after one year. Credit card: 20.00% APR. You carry a $5,000 balance for 12 months; you pay approximately $1,000 in interest (before fees). The APY and APR are not comparable figures — one is your gain, one is your cost.
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