Annual Percentage Rate vs. Annual Percentage Yield
August 12, 2025
In finance, similar-looking acronyms can hide very different meanings. Take APR and APY, for example. Annual percentage yield (APY) tells you how much interest you’ll earn on savings or investments, while annual percentage rate (APR) shows how much you’ll pay when borrowing money. Understanding APR—how it works, how it’s calculated, and why it matters—can help you make smarter borrowing decisions.
What Is APR?
APR is the yearly cost of borrowing, expressed as a percentage of your loan or credit balance. You’ll see it attached to mortgages, auto loans, credit cards, and other forms of credit. Knowing your APR can be the difference between overpaying and getting a fair deal.
For example, suppose you’re deciding between two cars priced at $24,000 each. One loan carries a 1.9% APR for 60 months, the other a 2.9% APR over the same term.
A single percentage point difference in APR would cost you more than $600 extra over the life of the loan. That’s why federal law requires lenders to disclose the APR before you commit.
What Counts as a “Good” APR?
A good APR depends on the type of borrowing:
● Secured loans (like car loans or mortgages) are backed by collateral, so lenders often offer lower APRs because their risk is lower.
● Unsecured loans (such as credit cards or personal loans) generally come with higher APRs since there’s no collateral for the lender to reclaim.
Your credit history plays a big role in determining your APR. A strong credit score can earn you lower rates, while a weaker score typically leads to higher costs.
How APR Is Calculated
The general formula for APR is:
● APR=(((Interest + Fees/Principal or Loan Amount)/(number of days)x365)x100
● Fees: Administrative charges, points, insurance premiums, or other costs
● Principal: Amount borrowed
● Number of days: Loan term length
Online calculators can make this easier by showing the true cost of borrowing across different offers.
Fees That Can Affect APR
Mortgages
● Points paid upfront to lower the interest rate
● Origination fees charged by the lender
● Private mortgage insurance (PMI) if your down payment is under 20%
Auto Loans
● Dealer processing fees
● Costs for add-ons like extended warranties or service packages
Credit Cards
Credit card APRs often start with the U.S. prime rate, then add a lender’s margin. Some cards have fixed APRs, while others have variable APRs that change when the prime rate moves.
Common Types of APR
● Fixed APR: Stays the same for the loan’s duration
● Variable APR: Changes with market interest rates
● Purchase APR: Applied to credit card purchases not paid off in full
● Introductory APR: A temporary lower rate for new accounts, sometimes 0%
● Balance Transfer APR: Rate applied to balances moved from another card
● Cash Advance APR: Rate on cash withdrawn from a credit card—usually higher
● Penalty APR: Higher rate applied if you miss payments or violate terms
APR vs. Interest Rate vs. APY
● Interest Rate: Base cost of borrowing, without fees
● APR: Interest rate plus fees, giving a truer picture of borrowing costs
● APY: Shows how much you’ll earn on savings or investments over a year, factoring in compounding
Quick memory trick: You pay APR, but APY pays you.
How to Get a Lower APR
● Improve your credit profile: Check your credit report for errors, pay bills on time, and maintain healthy credit habits.
● Lower your credit utilization: Keep your balances under 30% of your total credit limit.
● Shop around: Compare offers from different lenders before signing.
Bottom Line
By understanding APR—and how even small differences impact your total borrowing cost—you can make more informed financial choices and keep more money in your pocket.
Sources:
https://www.fidelity.com/learning-center/smart-money/what-is-apr
Disclosure:
This information is an overview and should not be considered as specific guidance or recommendations for any individual or business.
This material is provided as a courtesy and for educational purposes only.
These are the views of the author, not the named Representative or Advisory Services Network, LLC, and should not be construed as investment advice. Neither the named Representative nor Advisory Services Network, LLC gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information.