You will see both APR and APY on savings accounts, loans and credit cards. They look similar but measure different things, and mixing them up can make an offer look better or worse than it is.
What they mean
- APR (annual percentage rate) is the yearly interest rate without the effect of compounding. On loans and cards, it may also include certain fees.
- APY (annual percentage yield) is the yearly return including compounding, meaning interest earning interest.
The formula
Here n is the number of times interest is added each year: 12 for monthly, 365 for daily. If interest is added only once a year, APY and APR are the same.
How compounding changes the number
Take an account that advertises a 4% APR:
| Interest added | APY | Interest on $10,000 in a year |
|---|---|---|
| Once a year | 4.00% | $400.00 |
| Quarterly | 4.06% | $406.04 |
| Monthly | 4.07% | $407.42 |
| Daily | 4.08% | $408.08 |
The difference is small at low rates, but it grows with higher rates and longer periods.
Which one should you compare?
- Savings accounts, CDs and money market accounts: compare APY. It puts every account on the same footing.
- Loans and mortgages: compare APR, which reflects the yearly cost including many fees.
- Credit cards: the stated APR understates the true yearly cost when interest compounds daily or monthly. Carrying a balance costs more than the APR suggests.
Lenders like to advertise the number that looks best to you: banks lead with APY on savings because it is higher, and lead with APR on loans because it is lower.
Limits to remember
Savings rates are usually variable, so the advertised APY can change. Taxes and inflation reduce what you keep. Also check minimum balances and fees, which can wipe out a small rate advantage.
Convert either way with the APY calculator, or see how deposits grow over time with the compound interest calculator.