APY (Annual Percentage Yield) — what you earn on savings, including compounding. Higher is better.
APR (Annual Percentage Rate) — what you pay on loans and credit cards, excluding compounding. Lower is better.
How APY Works: Earning Interest on Interest
APY factors in how often interest compounds. If a bank offers 5% APY compounded monthly, you earn interest on your interest each month. Over a year, that 5% becomes slightly more than 5% effective yield.
APY = (1 + r/n)^n - 1
- r = Annual interest rate (decimal)
- n = Number of compounding periods per year
Example: 5% rate compounded monthly → APY = (1 + 0.05/12)^12 - 1 = 5.12%
How APR Works: The True Cost of Borrowing
APR includes the interest rate plus certain fees (origination fees, closing costs, etc.). It gives you a more complete picture of what a loan actually costs than the interest rate alone. However, unlike APY, APR does not account for compounding within the year.
APY — For Savers
Used for savings accounts, CDs, money market accounts.
Includes compounding effect.
Higher APY = More earnings
APR — For Borrowers
Used for mortgages, auto loans, credit cards.
Includes fees + interest rate.
Lower APR = Less cost
Why the Difference Matters
A savings account advertising 5.00% APY compounded daily actually earns you more than 5.00% — closer to 5.13%. But a credit card with 19.99% APR, when compounded daily, costs you an effective rate closer to 22%. The gap between stated rate and effective rate grows with compounding frequency.
Calculate It Yourself
Use our APY Calculator to compare savings accounts with different compounding frequencies, and our CD Calculator to see how certificate of deposit rates stack up.