Whether you’re consolidating high-interest credit card debt or saving money at the bank, understanding the interest rate is important so that you don’t pay more or get a lower return than you’d like. While annual percentage rate (APR) and annual percentage yield (APY) may sound similar, they measure different things. Knowing which metric applies to your situation is the first step toward accurately comparing financial products.

Let’s look at how APR and APY differ, how they’re calculated, where you’ll see each used, and what you should know to make an informed financial decision.

Key Considerations

APR shows the annualized cost of borrowing, including interest and certain fees. It applies to borrowing products like credit cards and loans. You want your APR to be low.
APY reflects the annual return you get with compounding factored in. It applies to deposit accounts. You want your APY to be as high as possible when you save.

What is APR and APY?

Both APR and APY reflect annualized percentage rates on financial products. However, an APR matters when you’re borrowing, and an APY is important when you’re saving.

APR

APR is the annualized cost of borrowing, expressed as a yearly rate, which may be fixed or variable. In addition to the interest rate, APR can include certain finance charges and fees. Which fees count will depend on the product type and the regulations that apply.

You’ll see APR stated for products like credit cards, personal loans, auto loans, and mortgages. Under the Truth in Lending Act (TILA), lenders must disclose a product’s APR so you can compare borrowing costs across products and financial institutions.

For credit cards, the APR is a nominal annual rate applied to periodic balances calculated daily. This means your actual cost depends heavily on whether you carry a balance, how long you carry it, and whether a grace period applies. For installment loans, APR reflects the interest rate and eligible fees spread across the loan term.

FYI

APR doesn’t always capture the full effective annual cost when interest compounds frequently. That’s where the effective annual rate (EAR) becomes relevant, particularly for revolving balances.

APY

APY is the annual return on a deposit account after compounding is factored in. You'll see it on high-yield savings accounts (HYSAs), money market deposit accounts, and certificates of deposit (CDs), among other types of deposit accounts. Like APR, it can be fixed or variable.

The Truth in Savings Act (Regulation DD) requires that financial institutions disclose an account’s APY along with how frequently interest compounds and is credited. Similar to the TILA rules for credit products, this disclosure is important for making accurate comparisons so you can scale your wealth.

Since APY already incorporates compounding, it gives you a more complete picture of what you'll actually earn over a year than a raw interest rate does. A savings account that compounds daily and credits monthly will have a higher APY than one that has the same stated rate but compounds annually.

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How do you calculate APR and APY?

Since lenders and financial institutions disclose APR and APY, you usually don’t have to worry about calculating them yourself. But it’s still helpful to know how the math works and the way it affects how much you pay or earn.

How is APR calculated?

APR is calculated by adding the interest rate and eligible finance charges, then expressing the total as an annualized rate relative to the loan amount and term.

Here’s what the formula looks like:

APR = (((Interest + Fees / Principal or loan mount) / Number of days) x 365) x 100

This formula accounts for the amount and timing of value you receive as a borrower. That’s why a fee-heavy short-term loan can have a dramatically higher APR than a long-term loan with the same interest rate.

APR vs. EAR

For credit cards, the issuer typically discloses a nominal APR and then applies a daily periodic rate (APR divided by 365) to your average daily balance.

If you pay your balance in full each month before the due date, the grace period eliminates interest. But if you carry a balance, interest accrues daily and compounds, which means your effective annual cost exceeds the stated APR.

That effective cost is sometimes called the EAR and uses this formula:

EAR = (1 + APR/365)³⁶⁵ − 1

For a credit card with a 24.99% APR compounding daily, the EAR is approximately 28.4%. That gap matters when you're deciding whether to carry a balance.

How is APY calculated?

APY is calculated using a compounding formula that accounts for how often interest is added to the principal, or the amount you’ve deposited:

APY = (1 + r/n)ⁿ −1

Here, r is the periodic interest rate, and n is the number of compounding periods per year. The more frequently interest compounds, the higher your APY will be compared to the stated rate.

For example, a 5% nominal rate compounded monthly produces an APY of approximately 5.116%. Compounded daily, it produces approximately 5.127%. The difference may seem small on a single year's deposit, but it compounds over time.

APR vs. APY: A quick recap

Here's a recap of the key differences to know between APR and APY:

	APR	APY
Used for	Loans, credit cards, mortgages	Savings accounts, CDs, money markets
Includes	Interest rate plus certain fees (product-dependent)	Effect of compounding on interest earned
Tells you	Annualized borrowing cost	Annualized deposit yield
Better when	Lower	Higher
Watch for	Fee treatment, loan term, variable vs. fixed rate	Compounding frequency, account fees, promo periods

APR vs. APY examples

Now that you understand how APR and APY work, let’s look at some examples so you can see the impact on interest paid or earned for popular financial products.

One-year personal loan

Suppose you take out a $5,000 personal loan with a 12-month term, 12% APR, and fixed monthly payments.

Because the loan amortizes—meaning each payment reduces the principal—you're not paying interest on $5,000 for the full year. Your total interest paid over 12 months would be approximately $331, and your monthly payment would be roughly $444.

This is meaningfully different from a scenario where interest is compounding at 12% on a constant principal. Amortization reduces your effective cost because the outstanding balance shrinks with each payment. APR captures this correctly.

12-month CD

Suppose you deposit $5,000 into a 12-month CD with a 5% nominal interest rate compounded monthly. Using the APY formula, you get an APY of around 5.116%. At the end of 12 months, assuming you make no withdrawals, you'd earn approximately $255.81 in interest.

For CDs, Regulation DD requires disclosure that the APY assumes your funds stay deposited until maturity. Early withdrawal reduces your actual yield and may trigger a penalty, so confirm the terms before opening the CD or removing funds before maturity.

Revolving balance on a credit card

Assume you carry a $3,000 balance on a credit card with a 24.99% APR compounded daily. The daily periodic rate is approximately 0.0685%. Monthly interest on that balance is roughly $62.40, and the EAR is approximately 28.39%.

If you only make minimum payments, the balance grows faster than you’d expect. However, paying in full during the grace period would allow you to avoid interest.

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If you're carrying high-interest credit card balances, you already know the math works against you. Variable APRs on revolving debt can make your interest costs climb quickly, and minimum payments often extend your repayment timeline far longer than you'd like. A fixed-rate debt consolidation loan can replace that unpredictability with a single, consistent monthly payment at a rate you know upfront.

For qualified borrowers, BHG Financial offers large, fixed-rate personal loans up to $250,000¹ with no collateral required and long terms up to 10 years.^1,2 There are no application fees to check your rate, and our easy prequalification process requires only a soft credit inquiry that doesn't affect your credit score.³

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APR vs. APY FAQs

Is it better to earn APR or APY, and which number should I focus on?

APY is the key metric when you're earning interest on deposits because it accounts for compounding and shows the effective annual return. APR is the key metric when you're paying interest on a loan or credit card because it summarizes your annual borrowing cost and can include certain fees.

The "better" number depends on the product category and your goal. You maximize earnings with a higher APY, while you minimize borrowing costs with a lower APR.

How do I compare APR vs. APY on credit cards, loans, and savings accounts without getting misled?

The most common mistake is comparing a loan APR to a savings APY as if they measure the same thing. So, start by separating borrowing products from savings products.

For loans and credit cards, compare APRs and check whether fees, promotional rates, penalty APRs, and compounding conventions affect the true cost. For deposit accounts, compare APYs and confirm how often interest is compounded and credited and whether there are tiered rates or minimum balance rules.

Is a 29.99% or 34.9% APR bad, and what should I compare it to?

Rates in the 29.99% to 34.9% APR range are generally considered high for most consumer borrowing products. To assess the impact, compare the specific APR to typical market ranges for the same product type, like a credit card or personal loan. Also, consider whether the rate is variable or promotional—or a penalty APR triggered by a missed payment—and factor in how quickly balances can grow if you carry debt.

Not all solutions, loan amounts, rates or terms are available in all states.

¹ Terms subject to credit approval upon completion of an application. Loan sizes, interest rates, and loan terms vary based on the applicant's credit profile. Not all applicants will qualify for the lowest rate.  

² Personal Loan Repayment Example: A $60,000 personal loan with a 7-year term and an APR of 17.06% would require 84 monthly payments of $1,191.38.

³ There is no impact on your credit for applying. For personal loans, a complete credit history, which will appear as an inquiry on your credit report, will be performed upon acceptance and funding of the loan and may impact your credit.

⁴ This is not a guaranteed offer of credit and is subject to credit approval.

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