APY vs. APR - What's the Difference?

If you’ve ever applied for a loan or opened a savings account, you’ve probably seen or heard the terms APY and APR and wondered what they mean or what the difference is between them. If you’ve visited CCCU online to learn more about our savings rates, you’ll see the definition of APY—annual percentage yield—right at the top of the page.

One of the most frequent questions members ask us at Clark County Credit Union is whether APR and APY are the same. The answer’s no, and understanding what makes them different can have a significant impact on how much interest you pay on loans and how much your investments earn over time.

APY vs. APR

Let’s start with the simpler of the two terms. Annual percentage rate or APR is the base rate of interest you get on your investments or that you pay a lender per year if you have a credit card, car loan, or some other debt. For instance, if your savings account has a balance of $200 and an APR of 2%, you’ll earn $4 by the end of the year.

There are two kinds of APR, fixed and variable. Many mortgage loans and personal loans have fixed rates, which means the APR rate will not change over the life of the loan. A variable APR is tied to what’s known as the “interest rate index.” When the index goes up or down, so does your APR, which can increase or decrease your loan payment.

Annual percentage yield or APY is a little more complex as it involves compound interest. Instead of earning (or paying) interest on your balance, you also make interest on the interest you’ve already realized. So, let’s say you calculate the interest you earn on your $200 savings account monthly. You’d get about 33 cents each month. At the end of month one, you’d have $200.33 in the account. At the end of month two, the credit union distributes interest based on the new balance of $200.33, not the $200. Continue that over the next ten months, and at the end of the year, you’ll have slightly more than the $4 APR rate.
APY can also be fixed or variable. When it comes to savings, the APY on savings accounts is generally variable, but certificates of deposit have a fixed APY for the term of the CD.

Credit Union Interest Rates

Knowing what APY and APR mean and how they’re calculated gives you a better understanding of just how hard your money is working for you. If you want to learn more about the rates we offer on savings products or loans, visit CCCU online or contact us by phone, email, mail, or chat today.