What’s the Difference Between the Interest Rate, APR, and APY?

When you're making financial decisions—whether it's opening a savings account, applying for a credit card, or taking out a loan—you'll come across terms like "interest rate," "APR," and "APY." These percentages can be confusing, especially since they all relate to interest, but mean slightly different things. Understanding these terms can help you compare offers more accurately and avoid surprises when it comes to your finances.

At Academy Bank, we believe in helping our clients make informed financial decisions. That starts with understanding the terms that influence your money. Keep reading to learn more about the differences between interest rate, APR, and APY, and why each one matters.

What Is an Interest Rate?

At its most basic level, an interest rate is the percentage charged or earned on a sum of money over time. When you borrow money—like with a loan or a credit card—the interest rate determines how much you'll pay in addition to repaying the principal. When you deposit money into a savings account, it's the amount you earn for keeping your funds with the bank.

For example, if you deposit $1,000 into a savings account with an annual interest rate of 2%, you'll earn $20 in interest after one year, assuming the rate stays the same and the interest is not compounded.

However, interest rates alone don’t always tell the full story. That’s where APR and APY come in.

What Is APR?

APR stands for Annual Percentage Rate. It represents the total yearly cost of borrowing, including the interest rate and any applicable fees—like loan origination fees or certain credit card charges.

For borrowers, the APR is a more comprehensive measure of how much a loan or credit card will actually cost. While the interest rate tells you the cost of borrowing money, the APR gives you the bigger picture by including additional charges.

For example, you may be offered a loan with a 6% interest rate and an APR of 6.5%. The higher APR accounts for fees added to the cost of borrowing.

APR and Credit Cards

APR is especially important when evaluating credit card offers. Many cards advertise low introductory interest rates, but the APR will give you a better idea of the ongoing cost if you carry a balance. If you are wondering how to calculate credit card interest, most issuers calculate it daily based on your average daily balance and the daily rate (so your APR divided by 365). Over time, these charges can add up, especially if you are only making minimum payments.

What Is APY?

APY stands for Annual Percentage Yield. This term applies to savings and investment products and reflects the total amount of interest you will earn in a year, accounting for the effects of compounding. That makes it different from a basic interest rate, which doesn’t include the effects of earning interest on interest.

Let’s say you deposit $5,000 into a savings account with a 2% interest rate. If that interest is compounded monthly, the APY will be higher than 2%. This happens because each month, you earn interest not just on the initial $5,000, but also on the interest that has been added to your account so far. (QUICK TIP: Need help crunching numbers? Use a Compound Interest Calculator).

So, while savings account interest rates give you a starting point, the APY gives you a more accurate view of how much your money will grow over time.

If you compare savings options, look for the best savings account interest rates and compare the APY—not just the interest rate. The higher the APY, the more your savings will earn, especially if you let it sit over the long term.

Why Do I Need to Know the Difference Between Interest Rates, APR, and APY?

Let’s say you are choosing between two savings accounts. One advertises a 1.95% interest rate, while the other offers a 1.90% interest rate but compounds interest daily, resulting in a 1.95% APY. Even though the interest rates are close, the second account will earn you slightly more over time because of the compounding effect reflected in the APY.

Now, consider a personal loan. You may be comparing two offers: one with a 6% interest rate and no fees, and another with a 5.5% interest rate but with upfront fees that raise the APR to 6.4%. Although the second loan has a lower interest rate, the first loan may actually be the better deal due to the lower APR.

If you're unsure how to calculate loan interest, or how to calculate interest on a loan, you can use online tools like Academy Bank’s financial calculators to get a clearer picture.

Interest Rate vs. APR vs. APY: Making Better Financial Decisions

Understanding interest rate vs. APR vs. APY is crucial for anyone managing debt or looking to grow their savings. Each metric serves a specific purpose:

• Interest Rate: The basic cost of borrowing or return on savings.
• APR: The total cost of borrowing, including interest and fees.
• APY: The total return on savings, including the effects of compounding.

Knowing when to use each one will help you compare financial products accurately and choose the option that best fits your goals. Whether you are opening a savings account or shopping for a credit card, paying attention to these numbers can help you save money and build financial stability.

Get Financial Support at Academy Bank

Choosing between financial products can feel overwhelming, but Academy Bank is here to help. From understanding interest rates to comparing savings and lending options, our tools and experts can guide you every step of the way.

We offer a range of calculators and online resources to help you make sense of interest-related decisions. Our mortgage loan calculator, loan comparison calculator, and more are designed to make complex financial terms easier to understand.

Visit Academy Bank online* today to explore our suite of calculators, savings accounts, and loan options. Let’s work together to reach your financial goals!