APR vs. APY: What's the Difference and Which One to Use

APR (annual percentage rate) is a simple yearly rate that does not include the effect of compounding; on loans it also folds in certain fees. APY (annual percentage yield) is the rate you actually earn or pay in a year once compounding is included. Banks quote APY on savings because it is the larger, more flattering number for depositors; lenders quote APR on loans because federal law requires it. A 5% APR compounded monthly equals a 5.116% APY.

Definitions in plain terms

The key idea: APR divides the year into equal slices and charges or pays the same slice each period. APY asks what happens when each slice of interest is added to the balance and starts earning interest itself.

The conversion formulas

To convert an APR (nominal rate) to an APY (effective rate):

To go the other way, from APY back to the APR for a given compounding frequency:

Here n is the number of compounding periods per year: 12 for monthly, 365 for daily. For continuous compounding, APY = e^APR − 1. The effective annual rate calculator and nominal interest rate calculator handle both directions.

Worked examples

Savings account. A bank pays 4.5% APR compounded monthly on $10,000.

• Monthly rate: 0.045 ÷ 12 = 0.375%
• APY: (1.00375)¹² − 1 = 4.594%
• Interest after one year: $10,000 × 0.04594 = $459.40, versus $450.00 if interest were not compounded

Comparing two savings offers. Bank A advertises 4.40% APY. Bank B advertises 4.35% compounded daily but does not show the APY. Convert Bank B: (1 + 0.0435 ÷ 365)³⁶⁵ − 1 = 4.446% APY. Bank B pays slightly more, even though its headline number is lower. Comparing APY to APY avoids this trap, and Regulation DD requires banks to disclose APY for exactly that reason.

Credit card. A card charges 24% APR and compounds daily, as most cards do. The daily periodic rate is 24% ÷ 365 = 0.0658%. If you carried the same balance all year without paying it down, the effective annual cost would be (1 + 0.24 ÷ 365)³⁶⁵ − 1 = 27.11%. With monthly compounding it would be 26.82%.

How compounding frequency widens the gap

The gap between APR and APY depends on both the rate and the frequency. Higher rates and more frequent compounding produce larger gaps:

At savings-account rates the difference is a few hundredths of a percent. At credit card rates it is nearly three percentage points.

Loan APR: it is about fees, not compounding

On installment loans, APR plays a different role. The Truth in Lending Act requires lenders to state the cost of credit as a yearly rate that includes the interest rate plus prepaid finance charges such as discount points, origination fees and certain other lender charges. The CFPB’s Loan Estimate shows both the note rate and the APR on page 3.

Here is how that works on a $300,000, 30-year fixed mortgage:

The APR is found by asking: what rate makes the monthly payment pay off only the amount you actually received (the loan minus the fees) over 360 months? Offer C has the lowest APR, so it is the cheapest if you keep the loan for the full term. Because APR spreads fees over 30 years, it understates the cost of upfront fees if you sell or refinance early. If you expect to move in five years, compare how long it takes for the lower payment to repay the fees; the mortgage points calculator does that break-even math. The APR calculator finds the APR for any loan amount, rate and fee total.

Which rate should you look at?

• Opening a savings account, CD or money market account: compare APY. It includes compounding, so the highest APY earns the most on the same balance. The CD calculator projects the ending balance.
• Taking out a mortgage, auto loan or personal loan: compare APR across lenders for the same loan amount and term, then check the fees and how long you will keep the loan.
• Carrying a credit card balance: the APR sets the daily periodic rate, but the effective cost is higher if interest compounds. Paying the statement balance in full keeps the grace period and avoids interest entirely. See how credit card interest is calculated and the credit card interest calculator.
• Investing: returns on funds are usually reported as annualized (effective) rates, which behave like APY.

Common mistakes

1. Comparing an APR to an APY. A loan’s 6.9% APR and a savings account’s 4.6% APY are measured differently; convert to the same basis before drawing conclusions.
2. Assuming the APR is your interest rate. On a mortgage, the payment is based on the note rate, not the APR.
3. Ignoring the compounding period. Two accounts with the same APR can pay different amounts if one compounds daily and the other annually.
4. Treating a promotional APY as permanent. Introductory rates often drop after a few months; read the account terms.
5. Forgetting variable rates. Both APR and APY can change on variable-rate products, such as credit cards and most savings accounts.

For a broader look at how growth builds on itself over many years, read how compound interest works.

This guide is for general education and is not financial advice. Rates, fees and disclosure details vary by product; rely on the official Loan Estimate, account disclosures or Truth in Savings statements from your lender or bank.