APR vs. APY: What’s the Difference and When to Use Each

APR and APY both express rates, but APR excludes compounding while APY includes it. Knowing which one to use prevents apples-to-oranges comparisons.

Quick definitions

APR is the yearly rate without compounding. APY includes the effect of compounding within the year.

When to use APR

Loans and credit (e.g., mortgages, auto loans, credit cards) are typically quoted in APR.

When to use APY

Savings products (e.g., deposits) use APY to reflect the benefit of compounding.

Formula refresher

APY ≈ (1 + APR/n)^(n) − 1, where n is the number of compounding periods per year.