Two annual percentages with different jobs
APR and APY both turn a rate into an annual percentage, but they usually describe opposite sides of a financial relationship. Annual Percentage Rate, or APR, generally describes the cost of borrowing through a loan or credit account. Annual Percentage Yield, or APY, describes the interest a deposit account can earn over a year after the effect of compounding.
That distinction matters because an APR and an APY are not two labels for the same number. They are disclosure measures created for different products and calculated under different rules. A credit-card APR belongs with credit terms. A savings-account APY belongs with deposit terms. Seeing both expressed as percentages does not make them directly interchangeable.
What APR communicates
APR is a yearly measure of the cost of credit. For many closed-end loans, it combines the interest rate with certain charges associated with making the loan. The exact costs included depend on the product and the applicable disclosure rules. A credit card can disclose different APRs for purchases, balance transfers, cash advances, and penalties.
APR helps compare similar borrowing offers on a consistent annual basis. It does not, by itself, tell you the dollar amount you will pay. The balance, payment schedule, length of time you carry the debt, fees, rate changes, and lender calculation method all affect the result.
APR also should not be read as an automatic statement of annual compounding. A lender may calculate interest daily, monthly, or according to another contract method. The APR is a standardized credit-cost disclosure, while the account agreement explains how interest is actually calculated and charged.
What APY communicates
APY is a yearly measure of interest earned on a deposit account that reflects both the interest rate and the frequency of compounding. Under federal deposit-account rules, APY is based on an annual period and assumes the principal and interest remain in the account for the relevant term. Because previously credited interest can earn more interest, APY can be higher than the account's stated interest rate when compounding occurs more than once a year.
APY makes it easier to compare deposit products that compound on different schedules. It still does not guarantee a particular number of dollars. Deposits, withdrawals, balance tiers, minimum-balance requirements, fees, changing rates, and early-withdrawal penalties can change what the account actually earns or keeps.
A simple comparison
Imagine a savings account with a 5 percent stated interest rate compounded monthly. If the rate and balance stayed unchanged and all interest remained deposited, the APY would be about 5.12 percent. The difference reflects interest earned on interest during the year.
Now imagine a loan advertised with a 5 percent APR. You cannot conclude that its cost is the mirror image of the savings account's return. The loan may have a changing balance, scheduled payments, included finance charges, and its own interest-calculation rules. The two 5 percent figures describe different products under different assumptions.
Use APR to compare similar credit offers and APY to compare similar deposit offers. For either comparison, also review the dollar amounts, fees, timing, fixed or variable rate, and product restrictions.
APR, APY, and EastStar
EastStar uses both rates, but in different parts of the app. A debt has an APR field. EastStar divides that annual rate by 12 to create an estimated monthly rate, applies the interest estimate to the simulated balance, and then applies the planned payment. This consistent model supports payoff projections and scenario comparisons, but it does not reproduce every lender's daily accrual, fee, promotional-rate, or payment-allocation rules.
A savings account has a separate APY field. EastStar treats the entered APY as an effective annual yield and converts it to an equivalent monthly growth rate. For each projected month, it applies that growth to the simulated account balance and then adds the planned monthly contribution. The dashboard can project combined savings growth over different time horizons, while savings goals and scenarios can use APY to estimate the contribution needed to reach a target by a chosen date.
Keep the rates in their matching fields: enter the applicable borrowing APR for a debt and the disclosed APY for a savings account or savings scenario. EastStar's savings model assumes that the APY and planned monthly contribution remain constant. It does not reproduce an institution's exact daily balance, interest-crediting schedule, rate changes, fees, taxes, or unplanned deposits and withdrawals.
Read beyond the headline rate
For credit, review the APR, finance charge, payment schedule, fees, and whether the rate can change. For a deposit account, review the APY, stated interest rate, compounding and crediting frequency, minimum balance, fees, rate tiers, and withdrawal conditions.
The most useful comparison keeps like with like: APR against APR for similar credit products, and APY against APY for similar deposit products. The official disclosures and account agreement provide the terms that control the actual cost or earnings.