The Differences Between APR, APY, and Interest Rates
7 Min Read | Last updated: July 10, 2026
This article contains general information and is not intended to provide information that is specific to American Express products and services. Similar products and services offered by different companies will have different features and you should always read about product details before acquiring any financial product.
APR vs. interest rate vs. APY: where to begin? APR and APY both include interest rates, but APR is mostly for borrowers, and APY is for investors.
At-A-Glance
- When comparing interest rate offers, it’s important to know the exact meaning of the different rates you are assessing.
- Knowing the difference between annual percentage rate (APR) and annual percentage yield (APY) can be critical to choosing the best interest rate.
- The usefulness of each kind of rate can depend on whether you’re borrowing or investing.
If you’re wading into the waters of borrowing or investing for the first time, you may be hearing unfamiliar terms, such as interest rate, nominal interest, annual percentage yield (APY), and annual percentage rate (APR)—especially if you’re researching mortgages or a home equity line of credit (HELOC). Consider the following overview of important differences between interest rates, APR, and APY as your life preserver in this alphabet soup.
APR vs. Interest Rate vs. APY: The Cheat Sheet
Perhaps the most practical things to know about annual APRs and APYs are the following:
- Both incorporate interest rates.
- Borrowers primarily use APRs to view the real cost of a loan or other debt.
- Investors primarily use APYs to view the actual yield of an investment.
That difference in the purpose of APRs vs. APYs leads to their other main differences:
- Lenders express APRs as an annual percentage of the loan’s principal (the amount you borrowed). The APR includes the loan’s interest rate, fees, and any other borrowing-related costs.1
- APYs show the impact of compounding interest on your investment—in other words, your investment’s true yield.
But if you’re brand new to borrowing or investing, there’s more you need to know to manage the APR vs. interest rate vs. APY differences outlined above in the real world.
Back to Basics: Interest Rates, Nominal Interest Rates, and APR
Your interest rate is what lenders charge you to borrow a set amount of money, usually quoted as a percentage. In the case of most installment loans, like mortgages and auto loans, the lender adds interest charges to the principal, and the borrower must repay the entire sum in monthly payments.2 Credit card interest rates differ slightly, and typically only apply if you carry a balance.
Understanding APR
APR measures many of the borrowing costs a lender charges per year. If there are no fees, the APR equals the nominal interest rate. If there are fees, a loan’s APR is its nominal interest charges plus any other borrowing costs, such as:
- Origination fees
- Closing costs
- Monthly maintenance fees
- Guarantee fees
- Check processing fees
Understanding APR can help you compare loans by their estimated total borrowing costs, since the higher the APR, the more money you pay back over the loan’s lifetime. You can figure out whether to choose a financing plan with a higher nominal interest rate and lower upfront fees. Alternatively, you can choose one with some extra fees upfront (like mortgage points) that can help lower interest rates.3
Credit cards can come with multiple APRs tied to specific activities. A purchase APR applies to everyday spending, while separate APRs may apply to balance transfers, cash advances, promotional introductory periods, or missed payments. Because each APR can affect costs differently, reviewing how each one works helps clarify what borrowing on a credit card could actually cost you.
What’s the Difference Between APR and APY for Investing?
Most of the time, interest is maximized in investing and minimized in borrowing. For savings deposits or investments, APY may be more useful, especially when comparing options with different compounding rates.
For example, consider two savings vehicles:
- Investment A pays 10% semi-annually.
- Investment B pays 10.2% annually.
Based on APR, Investment B appears more favorable, as 10.2% is higher than 10%. However, compounding results in an APY of 10.25% for Investment A, making it the option with higher earning potential.
Frequently Asked Questions
Understanding interest rates can always be helpful, especially if you want to budget properly for your monthly payments. However, you may develop a clearer picture of your loan’s overall costs if you go by APR. Mortgage APRs, for example, could include interest rates, plus broker and underwriting fees, certain closing costs, and even mortgage points if applicable. Just be aware that your APR may not include fees related to certain credit card activities, late fees, or early pay-off penalty fees associated with some loans.
If your APR is lower than your stated interest rate, your lender may have made a mistake on your loan’s documentation. Since your APR automatically includes many borrowing fees (excluding some case-by-case costs, like mortgage-related fees for credit checks, appraisal, escrow, etc., or specific credit card action fees), it can only be equal to or greater than your interest rate. You can clarify by calling your lender.
You may not be able to lower your APR on an existing credit card or loan. However, maintaining and building your credit score with on-time payments, lowering your credit usage, managing a variety of credit options responsibly over time, and reviewing your credit report for mistakes and unrecognized activity may help you secure lower APRs in the future. And once your credit score hits your ideal range, you may be able to ask your lender to lower your APR.
The Takeaway
When comparing offers for anything from HELOCs and installment loans like mortgages and car loans, to high-yield savings accounts (HYSAs), certificates of deposit (CDs), and checking accounts, it’s important to know the differences between APR vs. interest rates vs. APY. Understanding each can help you compare rates confidently and find the most effective loans and investments for your budget.
1,2 “APR vs. Interest Rate: What’s the Difference?,” Experian
3 “What are mortgage points and how do they work?,” Bankrate
Kristina Russo is a CPA and MBA with over 20 years of business experience in firms of all sizes and across several industries, including media and publishing, entertainment, retail, and manufacturing.
All Credit Intel content is written by freelance authors and commissioned and paid for by American Express.
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