APR vs. APY: What's the Difference?

The Key Distinction

APR (Annual Percentage Rate) is the simple annual interest rate without accounting for compounding. APY (Annual Percentage Yield) includes the effect of compounding and represents the true annual return or cost. APY is always equal to or greater than APR.

Why Banks Use Each Strategically

Financial institutions are required by law to disclose both rates, but they emphasize whichever makes their product look more attractive:

• Savings accounts and CDs: Banks advertise APY because it is higher than APR. A 4.95% APY sounds better than a 4.84% APR, even though they represent the same product.
• Loans and credit cards: Lenders advertise APR because it is lower than APY. A 19.99% APR sounds less alarming than the 21.94% APY that reflects the true compounding cost.

The Conversion Formula

To convert APR to APY: APY = (1 + APR/n)^n − 1, where n is the number of compounding periods per year.

Example: A savings account with 5% APR compounded monthly has an APY of (1 + 0.05/12)^12 − 1 = 5.116%.

When to Use APR vs. APY

Use APY when comparing savings products — it tells you exactly how much you will earn in a year. Use APR when comparing loans, but be aware that for loans, APR often also includes fees (origination fees, closing costs), making it a more comprehensive cost measure than the interest rate alone.

Practical Decision-Making

When shopping for a savings account, always compare APY. When evaluating a loan, compare APR — but also look at the total cost of the loan over its full term. A slightly higher APR on a shorter loan can cost less in total interest than a lower APR on a longer loan. Use our Loan Calculator to compare total costs.