APR stands for annual percentage rate. It is a credit-cost disclosure expressed as a yearly rate. APY stands for annual percentage yield. It is a deposit-account yield disclosure that reflects the interest rate and the effect of compounding.
A useful beginner shortcut is APR appears on borrowing; APY appears on deposit accounts. But the legal calculation details depend on the product, so the two terms should not be treated as interchangeable formulas.
APR vs. APY at a glance
| Question | APR | APY |
|---|---|---|
| Full name | Annual percentage rate | Annual percentage yield |
| Main U.S. disclosure context | Consumer credit | Deposit accounts |
| Core idea | Yearly measure of credit cost | Annualized deposit yield |
| Compounding reflected? | Product-specific APR rules apply | APY reflects interest and compounding |
| Main federal rule | Regulation Z / Truth in Lending | Regulation DD / Truth in Savings |
| Is it simply the ordinary interest rate? | Not always | No; APY is a standardized yield measure |
What APR means
The CFPB’s Regulation Z governs APR disclosures for consumer credit.
For credit cards, the CFPB explains that the interest rate is typically stated as a yearly rate called the APR. For closed-end credit, Regulation Z describes APR as a yearly measure of the cost of credit that relates the amount/timing of value received to the amount/timing of payments.
That distinction matters because “APR” is not one homemade formula that can be recalculated identically for every loan or card.
What APY means
APY is a deposit-account disclosure.
The CFPB’s Regulation DD Appendix A says APY measures the total amount of interest paid on an account based on the interest rate and the frequency of compounding.
That makes APY useful for comparing the yield disclosures of deposit products under a common regulatory framework.
Why “APR ignores compounding, APY includes it” is too broad
APY explicitly reflects the compounding assumptions required by Regulation DD.
But APR rules depend on the credit product. Closed-end APR calculations can incorporate finance-charge and timing concepts, while open-end credit such as credit cards follows its own Regulation Z disclosure rules.
The useful distinction is:
APY is designed as a deposit-yield measure that reflects compounding. APR is a regulated yearly credit-cost measure whose exact calculation depends on the credit product.
That is more accurate than pretending every APR is simply a nominal rate with compounding removed.
Simplified compounding/effective-yield illustration
Assume a fictional deposit example uses:
- nominal annual interest rate: 5.00%
- monthly compounding;
- no deposits or withdrawals during the year;
- no fees or other account conditions in the illustration.
For this simplified hypothetical compounding example:
effective annual yield illustration = (1 + r/n)^n − 1
Where:
- r = 0.05
- n = 12
The simplified result is approximately 5.12%.
The difference appears because interest credited during the year can itself earn interest.
This is not the complete Regulation DD APY disclosure formula. Official APY disclosures follow Regulation DD and the actual account terms, including the assumptions required by those rules. The formula here is only a simplified illustration of the compounding concept.
Same-looking percentage, different concept
Imagine two unrelated fictional products:
Product A — credit
Discloses a 5.00% APR.
Product B — deposit account
Discloses a 5.00% APY.
The two “5.00%” labels do not mean the products have the same economics. One is a credit-cost disclosure; the other is a deposit-yield disclosure.
The comparison also does not tell a person which product to choose.
Does APR include fees?
Sometimes certain finance charges are incorporated into APR calculations, especially in closed-end credit, but the exact treatment is governed by Regulation Z and the product type.
That is why “APR includes all fees” is too broad.
For a real credit product, the legal disclosure and agreement are the source of truth.
Does APY include fees?
APY is a standardized yield calculation, but account fees, minimum-balance requirements, withdrawal rules, or penalties can still affect the consumer’s actual outcome.
Truth in Savings requires additional disclosures beyond the APY itself.
Common misunderstandings
“APR and APY are two ways to state the same rate.”
No. They serve different disclosure purposes.
“APY is an investment-return promise.”
No. APY is a deposit-account disclosure concept.
“APR always includes every possible fee.”
No. Product-specific Regulation Z rules determine the calculation.
“A 5% APY means the account’s stated interest rate must also be 5%.”
Not necessarily. Compounding can make the APY differ from the nominal interest rate.
Where this fits in FIL
For borrowing mechanics, continue to Credit Card Interest and Minimum Payments.
For bank-account basics, continue to Checking, Savings, and Direct Deposit.
For the underlying math, continue to Simple vs. Compound Interest and the Simple vs. Compound Interest Explorer.
Educational boundary
This page explains federal disclosure concepts. It does not compare real products, calculate a personal borrowing cost, recommend a savings account, or predict an investment return.
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Official sources
These primary sources support the key factual claims on this page. Current rules and program details should always be verified with the issuing agency.