Two savings accounts both advertise “5%.” One pays noticeably more than the other. Two credit cards both say “20%,” but one costs you more. The reason is a distinction that quietly governs every rate you are ever quoted: APR versus APY. They sound interchangeable and are not, and the gap between them is real money.
You can compute the effective rate for any scenario with the APR Calculator and Interest Calculator.
The two numbers
- APR — Annual Percentage Rate. The yearly rate without compounding. It is the “nominal” or stated rate: if a card is 24% APR, that is 2% per month, quoted as 12 × 2% = 24%, ignoring that the months compound.
- APY — Annual Percentage Yield. The effective yearly rate with compounding folded in. It answers the real question: after a year, how much more do I actually have (or owe)?
Because compounding always adds a little, APY is always ≥ APR — and they are equal only when interest compounds exactly once per year. (Why compounding adds that bit is covered in Compound Interest Explained.)
How APY is calculated
Convert an APR to APY with the compounding frequency n:
Take a 12% APR compounded monthly (n = 12):
So “12% APR” compounded monthly is really 12.68% a year. On savings that extra 0.68% is in your favour; on a balance you owe, it is against you.
| APR | APY (monthly compounding) |
|---|---|
| 5% | 5.12% |
| 12% | 12.68% |
| 20% | 21.94% |
| 24% | 26.82% |
Notice the gap widens as the rate rises — which is exactly why high-interest debt is even worse than its sticker APR suggests.
Which one you see where
| Product | Usually quoted as | Why |
|---|---|---|
| Credit cards, loans, mortgages | APR | The lower number looks better on a cost |
| Savings, CDs, money markets | APY | The higher number looks better on a return |
APR and fees on loans
On loans, APR is often more than the bare interest rate because regulations require certain mandatory costs — origination fees, points, some closing costs — to be baked into it. That makes APR a better single number for comparing loan offers than the headline interest rate alone. It still does not capture intra-year compounding, so the true annual cost (the loan’s effective yield) is a touch higher again. For the biggest loan most people take, see How Mortgages Work.
In practice
The one-line takeaway: APR is the rate before compounding; APY is the rate after. Always read which one an offer quotes, convert when you need to compare fairly, and remember that the convention is usually chosen to flatter the product. Run the conversion for any rate with the APR Calculator, and see how rates fit the wider picture in How Interest Works.
Frequently asked questions
What is the difference between APR and APY?
APR (Annual Percentage Rate) is the yearly rate without compounding. APY (Annual Percentage Yield) is the effective yearly rate after compounding is included. For the same nominal rate, APY is always equal to or higher than APR — and they are only equal when interest compounds exactly once a year.
Which one should I look at?
For savings and investments, compare APY — it reflects what you actually earn. For loans and credit cards, the advertised APR is the standard comparison figure, but remember the real cost is higher once compounding (and any fees rolled into APR) is counted.
Why do banks advertise APR on loans but APY on savings?
Marketing incentives. On a loan, the lower APR number looks more attractive than the true compounded cost. On savings, the higher APY number looks more attractive than the bare rate. Knowing which is which lets you see through it.
Does APR include fees?
For loans, APR is often defined to fold in certain mandatory fees (like points or origination charges), which makes it a fuller cost measure than the bare interest rate — but it still does not account for intra-year compounding the way APY does.
How do I convert APR to APY?
Use APY = (1 + APR ÷ n)^n − 1, where n is how many times a year interest compounds. For example, a 12% APR compounded monthly (n = 12) is (1 + 0.01)^12 − 1 ≈ 12.68% APY. The more often it compounds, the bigger the gap between the two numbers.
Is a higher APY always better for savings?
For the return itself, yes — a higher APY means more earned, all else equal. But check the conditions: some accounts pay a high APY only up to a balance cap, only for an introductory period, or only if you meet activity requirements. Compare the APY you will realistically earn, not just the headline figure.
Does APY change if I do not withdraw the interest?
APY already assumes the interest stays in the account and compounds for a full year. If you withdraw the interest as it is paid, you earn closer to the simple APR instead, because there is nothing extra left to compound. Leaving it in is what makes the APY achievable.