APR and APY look almost identical and are constantly confused, but they answer different questions. Getting them straight can save you money on loans and help you compare savings accounts honestly.
Convert between them instantly with the APR vs APY calculator.
The one-sentence difference
- APR (annual percentage rate) is the nominal rate — it ignores compounding within the year.
- APY (annual percentage yield), also called the effective annual rate (EAR), includes compounding, so it shows what you truly pay or earn over a year.
Because compounding always adds a little, APY ≥ APR, and they are equal only when interest compounds exactly once a year.
Why APY is higher
Compounding means interest earns interest. If a rate compounds monthly, each month’s interest is added to the balance, and the next month’s interest is charged on that slightly larger balance. APR ignores this; APY captures it.
The formula:
APY = (1 + APR/n)ⁿ − 1
where n is the number of compounding periods per year. Going the other way:
APR = n · ((1 + APY)^(1/n) − 1)
The same rate, different compounding
Here is 6% APR expressed as APY at different compounding frequencies:
| Compounding | Periods/yr (n) | APY (effective) |
|---|---|---|
| Annually | 1 | 6.000% |
| Semi-annually | 2 | 6.090% |
| Quarterly | 4 | 6.136% |
| Monthly | 12 | 6.168% |
| Daily | 365 | 6.183% |
Computed with APY = (1 + 0.06/n)ⁿ − 1.
The more often interest compounds, the higher the effective rate — though the gains shrink as you go from monthly to daily (the difference approaches the continuous-compounding limit).
Which one is quoted — and why it matters
- Loans are typically advertised by APR. In the US, APR must also fold in certain fees, which is why a mortgage’s APR can be a touch higher than its stated interest rate.
- Savings accounts, CDs and money-market accounts are advertised by APY.
This asymmetry is not an accident: quoting loans in APR makes the cost look a little smaller, while quoting deposits in APY makes the return look a little bigger. To compare a loan rate against a savings yield, put both on the same basis — usually APY/EAR.
A practical example
Suppose a savings account offers 5% APY and you are told another pays 4.95% APR compounded daily. Which is better? Convert the second to APY: 4.95% daily ≈ 5.075% APY — so despite the lower headline number, the second account actually pays slightly more. Always convert before comparing.
Where this shows up in borrowing
When you shop for a personal loan or an auto loan, the APR is the right number to compare across lenders because it bundles most fees. But when you compare a loan’s true annual cost against an investment’s return, convert both to the effective annual rate first.
Key takeaways
- APR = nominal, ignores intra-year compounding.
- APY/EAR = effective, includes compounding, always ≥ APR.
- Lenders quote APR; banks quote APY — convert to compare fairly.
- More frequent compounding widens the gap, but with diminishing returns.
Understanding effective rates also helps you read an amortization schedule — see how mortgage amortization works.
This article is general education, not financial advice.