APR and APY sound similar and are often confused, but they answer slightly different questions, and picking the wrong one when comparing offers can lead you to the wrong conclusion.
APR: the annual percentage rate
APR is the nominal yearly interest rate before accounting for compounding within the year. If a credit card charges 24% APR, interest usually accrues monthly at 24% ÷ 12 = 2% per month, calculated on the current balance. APR is the standard way loans, mortgages, and credit cards are quoted, partly because regulation requires it and partly because it is the lower-looking number.
APY: the annual percentage yield
APY accounts for compounding, so it reflects what you would actually earn (or pay) over a year if the rate stayed constant. It is calculated as:
APY = (1 + APR / n)n − 1
where n is the number of compounding periods per year. Savings accounts, CDs, and investment products are usually advertised using APY, because compounding makes the number look bigger — and this time, bigger is genuinely better for you as the saver.
A worked comparison
A savings account with a 5% APR compounded monthly actually yields about 5.12% APY. The difference is small at low rates, but it grows with the rate and the compounding frequency. A credit card advertised at 24% APR, compounded monthly, is functionally closer to 26.8% APY if you carried the balance for a full year without paying anything down — a gap most people underestimate.
Why the two get mixed up
Financial institutions have some incentive to choose whichever number looks more favorable for the product they are selling: APR for anything you are borrowing (looks smaller), APY for anything you are saving or investing (looks bigger due to compounding). Regulations in most countries require APR to be disclosed on loans, which is helpful, but it still is not directly comparable to a savings account’s advertised APY without doing the conversion above.
How to compare offers correctly
- Compare like to like. Convert everything to either APR or APY before comparing two loans or two savings products, especially if their compounding frequency differs (monthly vs. daily vs. quarterly).
- For loans, look past the rate. Origination fees, annual fees, and closing costs are not captured by APR alone. A lower posted rate with high fees can cost more than a slightly higher rate with none.
- For savings, check the fine print. Some “high APY” accounts only apply the top rate to a limited balance, or require conditions like a minimum number of monthly transactions.
Frequently asked questions
If APY is always higher than APR, why would anyone quote APR?
Regulation requires APR disclosure on many loan types specifically because it is the more conservative, comparable figure for borrowing costs. It is not about which number is bigger, but which one the law requires for that product.
Does compounding frequency matter much in practice?
At typical consumer interest rates (a few percent to the high 20s), the difference between monthly and daily compounding is usually small. It matters more at very high rates or over very long time horizons.
Which one should I use in the compound interest calculator?
Our calculator asks for an annual rate and compounds it monthly internally, which is closest to an APR input. If you have an APY figure, it will slightly understate results since the calculator adds its own monthly compounding on top.