APR vs. APY: What's the Difference

How Better Understanding These Banking Terms Can Benefit You

When comparing financial products such as credit cards, personal loans, mortgages, or interest‑bearing deposit accounts, two terms appear frequently: APR and APY. While they may look similar, each plays a very different role in your financial decision‑making.

Understanding APR and APY isn’t just useful – it can directly influence how much interest you pay when borrowing or how much you earn when saving. With a solid grasp of these concepts, you can confidently evaluate financial products and choose those that best support your long‑term goals.

What Is APR?

APR (Annual Percentage Rate) represents the total yearly cost of borrowing money. Unlike a simple interest rate, APR includes many of the fees lenders charge, giving borrowers a clearer picture of the true cost of a loan.

Think of APR as the actual price tag of borrowing.

Key Features of APR:

Before selecting a loan or credit product, it’s important to understand what APR includes (and doesn’t include).
Here’s what sets APR apart:

Expressed as a yearly percentage
Includes interest plus certain lender fees (such as origination fees)
Most commonly applied to credit and loan products
Does not reflect compounding within the year

Where You’ll See APR:

APR is the standard comparison metric for most borrowing products, including:

APR Example:

If your loan has a 6% interest rate but includes additional fees, your APR may rise to 6.5% or more — giving you a more accurate measure of what you’ll pay overtime.

What Is APY?

APY (Annual Percentage Yield) measures how much you earn in a year on a deposit account, including the powerful effect of compound interest.

While a basic interest rate tells you what you earn on your principal alone, APY shows the true growth of your money as interest accumulates on both the original balance and previously earned interest.

APY is essentially the real return on your savings.

Key Features of APY:

Before choosing a deposit account, it's helpful to understand how APY works:

Expressed as a yearly percentage
Includes compound interest
Shows your total potential earnings over time
Used exclusively for deposit and savings products

Where You’ll See APY:

Banks and credit unions display APY on most interest‑bearing accounts, such as:

UNDERSTANDING THE DIFFERENCES BETWEEN CDS & SAVINGS ACCOUNTS

APY Example:

If a savings account advertises a 5% interest rate compounded monthly, the APY may be approximately 5.12% — representing your actual yearly earnings after compounding.

The Core Difference: Cost vs. Earnings

The easiest way to remember the difference:

APR = What you pay
APY = What you earn

APR applies to borrowing, while APY applies to saving or investing.

How Compounding Sets APR and APY Apart

Compounding is a major factor that separates APY from APR.

APY includes compounding, which increases your earnings as your interest builds on itself.
APR generally does not include compounding in its calculation, though in practice some interest‑bearing loans (like credit cards) do compound.

Why This Matters:

Compounding affects your finances in two very different ways:

With savings, compounding works in your favor, helping your balance grow faster.
With debt, compounding can work against you, making borrowing more expensive if unpaid balances grow over time.

THE POWER OF COMPOUND INTEREST: LETTING YOUR MONEY GROW

Why Banks Use Both Terms

Banks and credit unions use APR and APY so consumers can accurately compare financial products — but each metric serves a different purpose.

APR allows borrowers to compare the true cost of loans, taking fees into account.
APY helps savers understand how much their money can grow over time with compounding.

Using the wrong metric can lead to costly mistakes — such as choosing a loan based only on its interest rate (ignoring fees that raise APR) or overlooking APY when comparing savings accounts.

FINDING MORTGAGE JARGON HARD TO UNDERSTAND? LEARN THE COMMON TERMS BEFORE THE BIG CONVERSATIONS

Common Misunderstandings

Understanding APR and APY is easier when you avoid these common misconceptions:

“APR and APY are interchangeable.”
False, they measure completely different things.
“A lower interest rate always means a better loan.”
False, fees can push APR higher, even if the interest rate is low.
“A small difference in APY won’t matter.”
False, compounding amplifies even tiny APY differences — especially with larger balances or long-term savings.

IMPORTANT QUESTIONS TO ASK BEFORE TAKING ON DEBT

Using APR and APY to Your Advantage

Whether you're saving or borrowing, using APR and APY the right way can save — or earn — you more money.

When Borrowing:

Compare APR, not just the advertised interest rate
Watch for fees that inflate your APR
Understand how often interest is applied or compounded

When Saving:

Focus on APY to maximize your earnings
Consider how frequently interest compounds (daily compounding yields more than monthly)
Compare APYs across banks to find the most competitive return

Final Takeaway

Whether you're borrowing for a major purchase, opening a savings account, or planning for long‑term financial growth, knowing the difference between APR and APY helps you make smarter, more informed money decisions. APR shows the real cost of borrowing, while APY reveals your true earning potential — and understanding both puts you firmly in control of your financial wellbeing.

Looking for an array of savings or lending options? Visit our Shore United Bank website for more details or contact a branch near you today!

CONTACT SHORE UNITED BANK

*The examples provided in this article are for educational and illustrative purposes only. The APR, APY, and interest rate figures referenced in the scenarios do not reflect current market rates, actual offers, or specific financial products. Always check with your financial institution or lender for the most accurate, up‑to‑date information before making any financial decisions.