APY (annual percentage yield) is what you actually earn in a year, compounding included. APR (annual percentage rate) is the headline rate before compounding — the one lenders quote. A 5% rate compounded monthly is a 5.12% APY.
The 30-second version
- APY = what your savings earn. Higher is better. Includes compounding.
- APR = what your debt costs. Lower is better. Usually ignores compounding.
Banks advertise savings in APY (looks bigger) and loans in APR (looks smaller). Now you know why.
The math, once
APY = (1 + r/n)^n − 1, where r is the stated rate and n is compounding periods per year.
| Stated rate 5%, compounded… | APY |
|---|---|
| Annually | 5.00% |
| Quarterly | 5.09% |
| Monthly | 5.12% |
| Daily | 5.13% |
Same 5% headline, four different realities. When comparing savings accounts, compare APY to APY — never a headline rate to an APY.
Tip: If two banks both say '5%,' check the fine print: monthly compounding (5.12% APY) beats annual compounding (5.00% APY) on the same deposit.
The trap to watch
Some lenders quote a low APR while compounding aggressively or stacking fees — the effective cost is higher than the APR suggests. Credit cards are the classic case: a 24% APR compounded daily costs more than 24% over a year if you carry a balance.
Rule of thumb: for anything you earn, chase the highest APY. For anything you owe, chase the lowest effective rate — and read how often it compounds.
Run your own APY numbers
Our calculator handles every compounding frequency — see your true yield.
Open the interest calculator →Quick answers
Is APY the same as interest rate?
No. The interest rate is the headline; APY is what you actually earn after compounding. APY is always equal to or higher than the stated rate when compounding happens more than once a year.
Why do banks use APY for savings but APR for loans?
Marketing. APY makes savings look bigger; APR makes loans look cheaper. It's legal as long as both are disclosed — which is why you should always compare like with like.
Can APY change?
Yes — on variable-rate accounts, the bank can change the rate (and thus the APY) anytime. Fixed CDs and bonds lock it in.
General information only, not financial advice.