Welcome to the first installment of our Consumer Protection Series. Each week, for the next nine weeks, you’ll find beneficial articles related to protecting yourself. In this article, we learn the difference between APR and APY.
When navigating loans, savings, or any financial product, two terms you’ll often see are APR (annual percentage rate)and APY (annual percentage yield). Understanding the difference between them helps protect you from hidden costs and lets you make smarter financial decisions—whether you’re borrowing or saving.
What Do APR and APY Mean?
APR − Annual Percentage Rate
This is the cost of borrowing money over one year, expressed as a percentage. It includes not just the interest rate, but also certain fees or costs tied to the loan (origination fees, closing costs, etc.), depending on the loan type.
APY − Annual Percentage Yield
This is how much you would earn on savings, deposits, or investments over one year, expressed as a percentage, considering compounding (i.e. interest on interest). The more frequent the interest is compounded (daily, monthly, quarterly), the more impact this has.
What is the Difference Between APR and APY?
| Feature | Applied Mostly To… | What It Includes | What it Doesn’t |
| APR | Borrowing (loans, credit cards, mortgages) | Interest + some fees; shows cost of borrowing per year | Usually not compounding interest; may exclude fees that are paid separately depending on disclosures |
| APY | Savings or investment products (savings accounts, CDs, money market) | Interest + effects of compounding over the year | Borrowing costs; doesn’t tell you much about fees for loans |
Understanding How APR and APY Impact Credit Union Members
- For Borrowers: When you take a loan, mortgage, credit card—APR lets you see the real cost over time. Two loans might have similar interest rates, but if one has higher fees folded into the APR, it could end up much more expensive.
- For Savers: When choosing where to put your money—savings account, certificate of deposit (CD), etc.—APY helps you compare offers. Accounts with higher APY will increase your savings more, especially if the compound frequency is high.
- Transparency & Comparisons: Financial institutions are required to disclose APRs and APYs so consumers can compare. Being aware of them helps you avoid surprises—like a loan with hidden fees or a savings account that compounds only annually (thus earning less).
Some Examples to Clarify
- Suppose you borrow $10,000 via a 5% interest loan with $200 in fees. The nominal rate might be 5%, but the APR (which includes the fees) might be ~5.2% (just for illustration). That 0.2% difference matters over the life of the loan.
- Suppose you have two savings accounts:
- Account A: 5% interest rate compounded annually
- Account B: 5% interest rate compounded monthly
Account B will have a higher APY, so over a year your effective yield is higher than Account A due to more frequent compounding.
Tips to Use APR and APY Wisely
- Always compare similar products. Don’t compare a loan’s APR to a savings account’s APY—they serve different purposes.
- Check Fees. For loans, find out what’s included in the APR; sometimes fees (application, origination) can dramatically affect total cost.
- Review compounding frequency. For savings, the more often compounding happens, the better.
- Read disclosures carefully. Credit cards, mortgages, and other loans often include different APRs for purchases, balance transfers, cash advances, or penalties.
- Plan. If interest rates are variable, APR may change. For savings, APY can sometimes drop or rise depending on policy or market changes.
If you ever have questions about APRs or APYs in your specific credit union products—loan offers, savings accounts, or anything in between—we’re here to help.
For personalized help or to get more details, go to IC Credit Union ‐ Get in Touch.
