APR versus APY
APR (annual percentage rate) is the stated yearly rate before compounding. APY (annual percentage yield) is what you actually earn in a year once interest is added to the balance and earns interest itself. The more often interest compounds, the bigger the gap between the two.
The formulas
APY = (1 + APR ÷ n)n − 1
APR = n × ((1 + APY)1/n − 1)
n = number of compounding periods per year
APR = n × ((1 + APY)1/n − 1)
n = number of compounding periods per year
Example: 4% APR at different frequencies
| Compounding | APY |
|---|---|
| Annually | 4.0000% |
| Quarterly | 4.0604% |
| Monthly | 4.0742% |
| Daily | 4.0808% |
On a $10,000 deposit at 4% APR compounded daily, one year of interest is about $408, slightly more than the $400 that 4% simple interest would give.
Which one to use when
- Comparing savings accounts, CDs and money market accounts: use APY, because it is the same measure for all of them and already includes compounding.
- Comparing loans and credit cards: APR is the usual comparison figure. Credit cards that compound daily cost more than the stated APR suggests, because the effective yearly rate is higher.
Limits
The calculation assumes the rate stays the same for the year and that you make no deposits or withdrawals. Savings rates are variable and can change at any time, and taxes on interest are not included. For deposits over several years, use the compound interest calculator. Read more in APR vs APY explained.