APR vs APY: What's the Difference?

APR (Annual Percentage Rate) is the simple, non-compounded yearly cost of borrowing or return on a loan. APY (Annual Percentage Yield) is the actual annual return after factoring in how often interest compounds. Because compounding adds interest-on-interest, APY is always equal to or higher than APR for the same nominal rate.

These two abbreviations look nearly identical, but the letter that differs — R for "Rate" versus Y for "Yield" — points to a real mathematical gap that can cost or earn you money depending on which side of a transaction you're on. Lenders love quoting APR because it looks smaller. Banks advertise APY on savings products because it looks bigger. Neither is lying; they're just measuring different things.

The Formula

APY = (1 + APR/n)n − 1
n = number of compounding periods per year

Worked Example: $10,000 at 5% APR

Take a $10,000 deposit earning a nominal 5% APR, compounded at different frequencies:

CompoundingPeriods/YearResulting APYInterest Earned
Annually15.00%$500.00
Quarterly45.09%$509.45
Monthly125.12%$511.62
Daily3655.13%$512.67

Notice the gap grows with compounding frequency, but it caps out — going from monthly to daily only adds about a dollar on $10,000. The big jump is from annual (no compounding advantage) to quarterly.

Why It Matters in Practice

On a mortgage, APR is federally required to include certain lender fees and discount points, which is why the APR on a mortgage disclosure is usually a bit higher than the loan's plain interest rate — it's a more honest "true cost of borrowing" number. On a savings account or CD, APY is the number that reflects what you'll actually see in your account balance a year from now, because banks nearly always compound interest more than once annually (usually daily or monthly).

If you're comparing two credit cards, comparing APRs is standard and appropriate. If you're comparing two high-yield savings accounts, comparing APYs is the correct apples-to-apples method — comparing one bank's APR to another's APY would understate or overstate your real return.

Figures above are illustrative examples only and not financial advice. Always confirm the exact APR/APY disclosed by your specific lender or bank.

Frequently Asked Questions

Is APY always higher than APR?

Yes, whenever compounding happens more than once a year. APY equals APR only when interest compounds exactly once per year. The more frequently interest compounds, the bigger the gap.

Which rate should I look at for a savings account?

APY, because it reflects what you actually earn including compounding. Banks are required to advertise APY on deposit accounts so you can compare offers fairly.

Which rate should I look at for a loan or credit card?

APR, because it's the standard disclosure for borrowing costs and includes certain fees, giving a more apples-to-apples view of your total cost.

How do I convert APR to APY?

APY = (1 + APR/n)^n − 1, where n is the number of compounding periods per year. A 5% APR compounded monthly works out to roughly 5.12% APY.

Does APR include fees?

For mortgages and many loans, APR is required to include certain fees and points, which is why APR is often higher than the loan's stated interest rate.

Why do credit cards quote APR instead of APY?

Credit card issuers are required by law to disclose APR. Since APR looks smaller than the compounded APY equivalent, it's also the more favorable-looking number for the issuer to advertise.

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