Personal Finance · Explainer
APR and APY are not the same number
One describes the cost of borrowing, the other the return on saving, and compounding sits in the gap.
The short answer
- APR expresses an annual borrowing cost, typically excluding compounding within the year.
- APY (or AER) includes intra-year compounding, so it is higher than the nominal rate.
- Comparing a quoted APR against a quoted APY compares two different constructions.
Two accounts paying the same nominal rate can credit different amounts of money over a year, purely because of how often interest is added. That is the whole reason two acronyms exist.
APR
The annual percentage rate standardises the cost of credit so that products can be compared. In consumer lending it is required to fold in certain mandatory fees alongside interest, which is why an advertised APR can exceed the headline interest rate on the same loan.
APY and AER
The annual percentage yield — the AER in UK usage — states what a balance earns over a year once interest compounds at the stated frequency. Monthly compounding produces a slightly higher APY than the nominal rate; the difference widens as rates rise.
Where the quoted figure misleads
Introductory savings rates that include a temporary bonus, and loan APRs described as 'representative' — offered to only a proportion of accepted applicants — are both legitimate and both easy to misread. The binding number is the one in your own offer document.
Sources
- Truth in Lending (Regulation Z) — CFPB
- Savings rate rules — Financial Conduct Authority
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