APY vs APR
Understand the difference between APR and APY (effective annual rate) and why it matters when comparing products.
Quick definitions
- APR: the stated annual interest rate (does not include compounding).
- APY / EAR: the effective annual rate including compounding.
Why APY is better for comparing
If two products advertise the same APR but compound at different frequencies, the one compounding more often will produce a slightly higher yield. APY converts everything to a common annual basis.
Example
An 8% APR compounded monthly yields a higher effective annual rate than 8% compounded annually. Use the calculator to see the difference instantly.
The difference in one table
APY and APR both express a rate as an annual figure, and they are not interchangeable. The distinction matters most in the two places people compare them by accident: shopping for a savings account and shopping for a loan.
| APY | APR | |
|---|---|---|
| Used for | Savings, deposits, investments | Borrowing — loans, cards, mortgages |
| Includes compounding | Always | Not always — depends on jurisdiction and product |
| Includes fees | No | Often, depending on local rules |
| Better for you when | Higher | Lower |
| Formula | (1 + r/n)n − 1 | Varies by regulation; often nominal rate plus fees |
Because APR frequently excludes intra-year compounding while APY always includes it, a credit card quoting 24% APR compounded monthly actually costs about 26.82% over a year on a revolving balance. That is 2.82 percentage points more than the advertised figure, and the gap widens as the rate rises.
Comparing an APY on one product with an APR on another tells you nothing. Convert both to the same basis first. For savings, the APY calculator does it; for the general conversion, the effective annual rate calculator works in both directions.
Where each one misleads
- APY on introductory rates. An advertised APY assumes the rate persists for a year. A three-month bonus rate followed by a low standard rate produces a blended return far below the headline.
- APY ignores fees. A monthly account fee can wipe out a rate advantage entirely on a small balance.
- APR on short loans. Expressing a two-week loan as an annual rate produces figures that are technically correct and practically useless.
- APR definitions differ by country. What must be included varies, so APRs are reliably comparable within a market and unreliably comparable across markets.
On borrowing, the number that actually matters is the total amount repaid over the life of the loan. Rates are a way of comparing; the total is what you pay.
Questions about APY and APR
What is the difference between APY and APR?
APY is the annual yield on savings including compounding. APR is the annual rate on borrowing, which may include fees but often excludes intra-year compounding. Higher APY is good for you; lower APR is good for you.
Is APR always lower than APY?
For the same underlying rate and compounding, the effective cost is higher than a nominal APR, so APR understates what you pay. A 24% APR compounded monthly costs about 26.82% effectively.
Which should I use to compare savings accounts?
APY, and then check fees and conditions separately. APY already accounts for compounding frequency, which is what makes it comparable across products.
Does APR include fees?
In many jurisdictions, yes for certain products — which is the main reason APR can exceed the headline interest rate on a loan. The rules differ by country and product type.