What is the difference between APR & APY? Regions (2024)

FAQs

What is the difference between APR & APY? Regions? ›

Both are helpful when you're shopping for rates and comparing which is best for you. APY helps you see how much you could earn over a year in a savings account or CD. APR helps you estimate how much you could owe on a home loan, car loan, personal loan, or credit card.

APR is related to borrowing money, as it helps you understand the total cost of the loan, including interest and fees. When borrowing, a lower APR is preferable because it means lower costs associated with the loan. APY reflects the potential return on your investment, accounting for compounding interest.

Still, the key thing to note is that interest is the percentage you earn on a balance, while APY measures the interest you'd make over a period of time — typically a year — with compound interest included. With savings accounts, banks advertise the APY to give you a clear picture of how much your money will earn.

APY reflects the total amount of interest you earn on money in an account over one year, while an interest rate is the rate at which interest is earned on the original amount. Both are expressed as percentages.

Imagine you put $10,000 in an account that earns 5% APY, compounded annually. In the first year, you'd earn $500 (5% of $10,000). Now, your total is $10,500.

For example, $1,000 put into an account with an annual interest rate of 5% would, in theory, earn $50 at the end of the year. However, if the rate is 5% with interest earned monthly, the APY would actually be 5.116%, earning you $1051.16 by the end of the first year.

The best CD rate right now is 5.25% APY available from 11 different banks or credit unions with terms ranging from three months to 12 months. All CDs and rates in our rankings were collected, verified, and available to open as of Sept. 16, 2024.

APY is a broader measure than just the interest rate. That's because it also reflects compound interest and how often compounding happens in a year. Compound interest means you don't earn interest on just what you've deposited. You also earn additional interest on the interest you've already earned.

APR is short for Annual Percentage Rate and is a mix of different fees and interest you pay for the right to borrow money. The APR you receive is based on your credit score – the higher your score, the lower your APR. A good APR is around 22%, which is the current average for credit cards.

Is APY good or bad? ›

The APY you can earn for each type of account can vary greatly depending on whether your account is with a traditional bank, online bank or credit union. APY can tell you at a glance how much your money could grow over a year. As a general rule, the higher the APY for an interest-bearing account, the better.

An APY includes the effect of compound interest, which is when both your principal and the accumulated interest earn interest. Compounding helps your cash grow faster than simple interest, which pays interest only on the principal. Interest on an account can compound yearly, monthly, quarterly or daily.

While both APY and the interest rate indicate how much you can earn from a savings account or investment, they do so in different ways. APY takes into account the effects of compounding, while the interest rate doesn't. The APY, then, is the effective rate of return for an account that earns compound interest.

The interest rate on your savings account is the base rate at which interest is earned. Say you have an interest rate of 3%. This means that a $10,000 deposit will earn $300 in interest over the course of a year.

So, if you had a high-yield savings account in 2023 that paid an APY of 5.25% and you got a $200 bonus for opening the account, you'd pay taxes on the interest earned at 5.25% as well as the $200 bonus. The amount of tax you pay on savings account interest and sign-up bonuses corresponds with your federal tax bracket.

While the average savings rate is 0.46%, the best high-yield savings accounts offer an APY ranging from 4.25% to 5.26%. The best rates for savings accounts typically come from online-only banks. An online bank can offer higher rates since it doesn't have the same costs as brick-and-mortar banks.

Annual percentage rate (APR) refers to the yearly interest generated by a sum that's charged to borrowers or paid to investors. APR is expressed as a percentage that represents the actual yearly cost of funds over the term of a loan or income earned on an investment.

The Bottom Line. While the interest rate determines the cost of borrowing money, the annual percentage rate (APR) is a more accurate picture of total borrowing cost because it takes into consideration other expenses associated with procuring a loan, particularly a mortgage.

By comparison, interest rates for some high-yield savings accounts exceed 5.00%. Vanessa Potter, assistant vice president and branch manager at Addition Financial Credit Union, pegs the best interest rate for a savings account at 4.00% or more.