APR vs. APY: Why the Difference Matters
APR is what borrowing costs; APY is what saving earns. The difference is compounding — which is why banks quote APY on savings and APR on loans. Here's how to compare the right number on each side.
Key takeaways
- APR ignores compounding; APY includes it, so APY is always equal to or higher.
- Compare savings and CDs on APY — it captures how often interest compounds.
- Compare loans on APR — it also folds in fees and points, not just interest.
- A credit card's real cost (effective APY) is slightly higher than its quoted APR.
APR and APY look almost identical but answer opposite questions. APR (annual percentage rate) is what borrowing costs you; APY (annual percentage yield) is what saving earns you. The difference between them is compounding — and knowing which is which keeps banks from quoting you the flattering number.
The core difference: compounding
APR is a simple annual rate that ignores compounding within the year. APY folds compounding in, so it reflects the true yearly figure once interest starts earning interest. Because compounding always helps, APY is equal to or higher than the nominal rate — which is exactly why banks advertise APY on savings and APR on loans.
On savings, compare APY
Two savings accounts quoting the same 5% can pay different amounts depending on how often they compound — daily beats monthly beats annually. APY captures that, so it's the honest way to compare accounts and CDs. Federal law (the Truth in Savings Act) requires banks to disclose APY for this reason; always compare deposit products on APY, not the stated rate.
On loans, compare APR
For borrowing, APR is the number to compare — but note that a loan's APR also rolls in certain fees and points, not just interest. That makes APR higher than the note rate and a fairer basis for comparing two mortgages or personal loans. The catch: a credit card's APR ignores the effect of monthly compounding, so the rate your balance actually grows at (the effective APY) is a bit higher than the quoted APR.
A quick example
Take a 5% nominal rate. As a savings APY compounded monthly, it becomes about 5.12% — the extra 0.12% is the compounding boost working for you. As a credit-card APR compounded monthly on a balance you carry, that same 5% effectively costs about 5.12% — the boost now working against you. Same math, opposite direction.
See the boost yourself
Use the APY calculator below to convert any nominal rate and compounding frequency into the true annual yield, and the APR calculator to see how loan fees push a note rate up to its real APR. Comparing the right number on each side is a five-minute habit that quietly saves real money.
Related calculators
APY Calculator
Convert a nominal interest rate and compounding frequency into APY — the real annual yield — so you can compare savings accounts and CDs on equal footing.
APR Calculator
See a loan's true cost. Enter the rate, term, and upfront fees to get the real APR — the number that folds points and closing costs into one annual figure you can compare across offers.
CD Calculator
Calculate a certificate of deposit's value at maturity, the interest earned, and the true APY from any rate and compounding frequency.
Savings Calculator
Watch your savings account grow: enter your balance, monthly deposit, and APY to see the future value and every dollar of interest along the way.
Frequently asked questions
Is APR or APY higher?
For the same nominal rate, APY is always equal to or higher than APR, because APY includes the effect of compounding within the year and APR doesn't. That's why banks advertise APY on savings accounts (the bigger, more attractive number) and APR on loans (the smaller one).
Should I use APR or APY to compare savings accounts?
APY. Two accounts at the same nominal rate can pay different amounts depending on whether they compound daily, monthly, or annually — and APY captures that difference. Federal law requires banks to disclose APY on deposits precisely so you can compare them fairly.
Why do credit cards quote APR instead of APY?
Because APR is the legally required disclosure for credit, and it's the smaller number. Most cards compound interest daily on carried balances, so the rate your balance actually grows at — the effective APY — is a little higher than the stated APR. Paying in full each month avoids interest entirely.
Sources
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Disclaimer: DayCents provides this calculator for educational purposes only. Results are estimates based on your inputs and the stated assumptions — they are not financial advice, a quote, or an offer of credit. Consult a qualified financial professional before making major money decisions.