APY vs APR: How They Differ and When Each Matters
APY (annual percentage yield) and APR (annual percentage rate) are the two most-confused numbers in personal finance. They look similar, sound similar, and are sometimes used interchangeably in casual conversation — but they are mathematically distinct, and US federal law requires lenders and depository institutions to disclose them differently. APY is what you earn; APR is what you pay (or, more precisely, the simple annual rate before compounding effects). The gap between APY and APR widens as compounding gets more frequent. At low rates the difference is small. At higher rates it stops being small. This guide walks through the math, the federal disclosure framework, and the practical implications for savings accounts, credit cards, and loans.
The math, in one screen
APR is the simple annual interest rate. If your credit card has an APR of 24%, that's the rate the issuer applies to your balance over a year — but they typically apply it on a daily basis. Daily periodic rate = APR ÷ 365 = 24% ÷ 365 = 0.0658% per day.
APY is what the rate actually compounds to over a year. APY = (1 + APR/n)^n − 1, where n is the compounding periods per year.
For 24% APR compounded daily: APY = (1 + 0.24/365)^365 − 1 ≈ 27.11%.
For 5% APR compounded monthly: APY = (1 + 0.05/12)^12 − 1 ≈ 5.116%.
For 5% APR compounded daily: APY = (1 + 0.05/365)^365 − 1 ≈ 5.127%.
The difference between monthly and daily compounding at 5% APR is about 1.1 basis points (0.011 percentage points). Real, but small.
Why the law requires APY for savings and APR for loans
Two different US federal laws govern this.
Truth in Savings Act (TISA, 1991) — administered by the Consumer Financial Protection Bureau — requires depository institutions to disclose APY when advertising savings products. The reasoning: if banks could advertise either APR or APY, they would advertise whichever number sounded better, and consumers couldn't directly compare two accounts. Mandating APY across the board makes savings rates apples-to-apples.
Truth in Lending Act (TILA, 1968) — also administered by CFPB — requires creditors to disclose APR for closed-end loans (mortgages, auto loans, personal loans) and credit cards. The reasoning is different: the APR for a loan is supposed to capture the cost of credit including certain mandatory fees (origination, points), not just the nominal interest rate. APR-as-disclosed for a loan is therefore a slightly inflated version of the contract interest rate.
The result is a paradox. APY for savings is the larger of the two numbers (it includes compounding, which helps savers). APR for loans is also the larger of the two numbers (it includes fees, which hurt borrowers). Both regimes try to give consumers the most-conservative-from-their-perspective figure to compare.
When the gap matters
For deposit accounts at typical 2026 rates (4%–5% APY), the APR-vs-APY gap is small enough that most savers won't make a different decision based on it. For credit card balances at 20%+ APR, the gap matters substantially — a 24% APR compounded daily is a 27.11% effective annual cost on revolving balances.
For mortgages, APR includes fees but the underlying mechanics are different — most US mortgages compute interest monthly on the outstanding balance, and the APR disclosed at origination assumes you hold the loan to maturity. If you refinance or sell the home in year three, the realized APR is different from the disclosed APR, because the upfront fees get amortized over a shorter period.
The single useful rule
When comparing two savings products, compare APY to APY. When comparing two loan products, compare APR to APR. Don't compare APY on one to APR on the other — that's not a fair comparison.
If you want to know what compounded cost you'll actually pay on a loan, compute the APY of the loan's APR using the formula above. For a 24% APR credit card, the implied APY (the cost you actually pay if you carry a balance for a year) is 27.11%.