Finance & Money
Understanding APR, APY and the rate that actually applies
Three numbers describe the cost of the same loan and they are not interchangeable. Knowing which is which makes most offers comparable.
The nominal rate is the simple annual rate before anything else is counted. The annual percentage rate folds in certain fees and points, which is why it is normally the higher of the two on a loan and why it is the one lenders must disclose. On savings, the annual percentage yield plays the equivalent role by accounting for compounding.
Comparing a nominal rate from one lender against an APR from another will make the first look cheaper every time. The disclosures exist so that like can be set against like, and using them that way is most of the skill.
APR has a known blind spot: it is calculated over the loan's full stated term. If you expect to sell, move or refinance earlier, an offer with lower fees and a slightly higher rate can cost less in practice than its APR suggests.
On variable products, the rate quoted is the rate today. The documents will state what it is tied to, how often it can move and whether a cap applies, and those three facts matter more than the opening number.
What to do next. Ask every lender for the same disclosure form, compare APR against APR, and ask what a variable rate is tied to.
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