Two of the most common numbers in everyday finance are also two of the most confused. APR appears on your loan and credit-card statements; APY appears on your savings account and CD. They differ by a single letter — and, often, by real money. Here's the difference.

The one idea that separates them: compounding

Both are annual interest rates expressed as a percentage. The distinction comes down to compounding — earning (or paying) interest on interest that has already accrued.

  • APR (annual percentage rate) is the simple annual rate, before compounding. It's the standard way to state the cost of borrowing.
  • APY (annual percentage yield) is the effective annual rate, after compounding is figured in. It's the standard way to state what savings actually earn.

Because APY captures compounding and APR doesn't, APY is always equal to or higher than the simple rate it's built from. The more frequently interest compounds — daily rather than yearly — the wider the gap.

APR: what you pay to borrow

By U.S. law, lenders must disclose the APR on loans and credit cards, and it's designed to help you compare offers, as the Consumer Financial Protection Bureau explains. Crucially, on many loans the APR is broader than the interest rate alone: for a mortgage, it folds in certain fees and points, so it usually runs a bit higher than the headline "interest rate" and gives a truer picture of the yearly cost.

One important quirk: on credit cards, the quoted APR is essentially the interest rate, but because card interest typically compounds daily, the amount you actually pay if you carry a balance works out slightly higher than the APR suggests, per the CFPB. The lesson: APR is the comparison tool for the cost of debt — but compounding still lurks underneath it.

APY: what you earn to save

On the saving side, banks advertise the APY on savings accounts, money-market accounts and certificates of deposit (CDs), as Investopedia describes. APY already includes the effect of compounding, which is exactly why it's the honest figure to compare — it tells you what a dollar will actually grow to over a year.

A quick example makes the gap concrete. A savings account paying a 5% simple rate that compounds daily yields an APY of about 5.13%. On $10,000, that's roughly $513 in a year rather than $500 — a small edge that compounds into something meaningful over time.

How to use the difference

The practical rules are simple:

  • Borrowing? Compare the APR across offers — and remember it may already include fees on loans like mortgages.
  • Saving? Compare the APY, not the simple "interest rate," so the compounding is baked in.
  • Comparing like with like? Make sure you're matching APR to APR and APY to APY. A lender quoting a low simple rate and a bank quoting a high APY are using different yardsticks.

The bottom line: APR tells you the cost of money you borrow; APY tells you the return on money you save; and the space between them is compounding. Boursel gives no individual financial advice — but knowing which number you're looking at is the difference between comparing offers accurately and being quietly misled by a single missing letter.