APR vs APY
APR and APY are both annual rates, but they answer different questions. APR shows the yearly cost of borrowing as a simple rate, and it can include loan fees that are not part of the nominal interest rate. APY shows the yearly return after interest has compounded, meaning interest has been added to the balance and can earn more interest. Put simply: APR is mainly for comparing borrowing costs; APY is mainly for comparing what a savings or deposit balance can earn after compounding.
The core difference
APR stands for annual percentage rate. It is usually used for loans, credit cards and other borrowing. Its job is to turn the cost of credit into a single annual figure so you can compare one offer with another.
That comparison matters because the nominal rate is not always the full cost. A loan can have a stated interest rate and also charge required fees. APR brings those borrowing costs into the rate, while the nominal rate does not.
APY stands for annual percentage yield. It is usually used for savings accounts, deposits and other interest-earning products. Its job is to show the effective return once compounding is included.
How compounding changes the rate
Compounding means interest gets added to the balance, then future interest is calculated on the larger balance. For savings, that helps you. Your interest starts earning interest.
APY includes that effect. If two savings products have the same stated rate but one compounds more often, the one that compounds more often will have the higher APY. The quoted APY is the figure that reflects the actual annual growth from compounding, before considering anything outside the rate itself.
APR does not usually do that job. It presents borrowing cost as a simple annual rate, rather than showing the effect of interest being added and charged again within the period. That is why an APR and an APY can look different even when they start from the same stated interest rate.
What APR includes that the nominal rate misses
The nominal rate is the basic interest rate before required borrowing costs are folded in. APR is broader. It can include charges such as required lender fees, depending on the product and the rules that apply to it.
That is why APR is often more useful than the nominal rate when comparing loans. A loan with a lower nominal rate can still cost more if its required fees are higher. APR helps bring those costs into the comparison.
APY does not serve that same purpose. It is not a fee-inclusive borrowing measure. It is a compounding measure for money that earns interest.
Which one to look at
Use APR when you want to understand the cost of borrowing. Use APY when you want to understand the return from an interest-earning balance.
The safest comparison is like with like: APR against APR for loans, and APY against APY for savings or deposits. If a product shows only a nominal rate, ask what costs or compounding effects are missing from that figure.