APR vs APY: What Is the Difference?
APR and APY both describe a yearly interest rate, but they are not the same number. APR leaves compounding out; APY puts it in. Lenders tend to quote APR on loans, and banks quote APY on savings, so knowing APR vs APY helps you compare offers fairly.
What APR means
The annual percentage rate is the periodic rate times the number of periods in a year. On a loan, it also folds in upfront fees, so it reflects the true yearly cost of borrowing. A card that charges 1% a month has a 12% APR. The APR calculator works out a loan APR with fees included.
What APY means
The annual percentage yield adds the effect of interest earning interest within the year:
APY = (1 + APR ÷ n)n − 1
n is the number of compounding periods a year: 12 for monthly, 365 for daily. The more often interest compounds, the further APY sits above APR.
APR to APY examples
| APR | Compounding | APY |
|---|---|---|
| 5% | Yearly | 5.00% |
| 5% | Monthly | 5.12% |
| 5% | Daily | 5.13% |
| 12% | Monthly | 12.68% |
| 24% | Monthly | 26.82% |
At low rates the gap is small; at credit card rates it is more than two points. To see compounding on a real balance, use the compound interest calculator.
APY to APR
To go the other way, reverse the formula:
APR = n × ((1 + APY)1/n − 1)
A savings account paying 5.12% APY with monthly compounding has an APR of 12 × (1.05121/12 − 1) = 5.00%.
Why lenders quote APR and banks quote APY
A lower-looking number helps sell a loan, and APR is the lower of the two. A higher-looking number helps sell a savings account, and APY is the higher. Both are legitimate, but compare loans with loans by APR and savings with savings by APY. Never compare a loan APR against a savings APY.
Where simple interest fits
Some loans charge interest only on the original balance, with no compounding at all. For those, APR and APY are the same, and the math is covered in how to calculate simple interest.
Common mistakes
- Comparing APR with APY. Convert one into the other first.
- Ignoring compounding frequency. Daily and monthly give different APYs.
- Forgetting fees. A loan APR includes fees; the bare interest rate does not.
To see how a loan APR turns into a monthly payment and schedule, use the loan payment calculator.
Quick reference
APY = (1 + APR ÷ n)n − 1. Loans: compare APR. Savings: compare APY. Convert any rate with an online calculator free to use on CalculateGuide.