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BankingBank websites bombard you with percentages: 4.50% APR on a loan, 5.00% APY on a savings account. They look like the same thing — but they measure different realities, and mixing them up can cost you real money.
Here's the one-sentence version: APR is the price of borrowing; APY is the true yield on savings. APR ignores compounding; APY includes it. Once you know which to look at, comparison shopping gets simple.
Try it yourself: See exactly how compounding frequency changes your return. Compound Interest Calculator →
APR: the sticker price of a loan
APR (Annual Percentage Rate) is the yearly cost of borrowing, quoted as a single number. In many countries lenders must quote it because it bundles the base interest rate with most mandatory fees — origination charges, points, some insurance — so two loans' APRs are comparable.
APR's blind spot: it typically ignores compounding frequency. A loan quoted at 12% APR could mean 1% per month (the usual interpretation) — the monthly rate is just APR ÷ 12. Our companion guide covers the related nuance of APR vs the interest rate itself.
APY: the true yield you actually earn
APY (Annual Percentage Yield) answers the question "if I leave my money here a year, what do I really get?" — including interest-on-interest. The formula:
APY = (1 + r ÷ n)n − 1
r = nominal rate · n = compounding periods per year
r = nominal rate · n = compounding periods per year
A 5% rate compounded monthly: (1 + 0.05/12)12 − 1 ≈ 5.12% APY. Compounded daily, it's about 5.13%. Small differences at 5%, but at higher rates the gap widens — which is why APY is the only honest number for comparing savings accounts.
Example: $10,000 in savings for one year
| Account | Quoted | Real yield | Earnings |
|---|---|---|---|
| Bank A | 4.75% annual compounding | 4.75% APY | $475 |
| Bank B | 4.70% monthly compounding | 4.80% APY | $480 |
| Bank C | 4.85% monthly compounding | 4.96% APY | $496 |
Bank B's quoted rate is lower than Bank A's, yet it pays more — compounding frequency wins. Always compare the APY, never the headline rate.
The cheat sheet
- Comparing loans? Look at APR — lower is better. (Fees included, roughly.)
- Comparing savings, CDs, money-market accounts? Look at APY — higher is better.
- Credit card? APR. Savings account? APY.
- Watch for tricks: "5% APY" on a promo that drops after 90 days, or a high APR with fees excluded from the quote.
Frequently asked questions
APY is higher whenever interest compounds more than once a year, because APY includes interest-on-interest. A 5% rate compounded monthly gives an APY of about 5.12%. They are only equal when interest is credited once a year with no compounding.
Use APY. It reflects what your money actually earns in a year, including compounding, so it's the only apples-to-apples number across accounts. Two accounts can share the same advertised rate but differ in APY if one compounds daily and the other monthly.
Use APR. Lenders are required in many countries to quote APR, and it bundles the interest rate with most mandatory fees, making loans comparable. Note that APR typically ignores compounding frequency, so always check the effective annual rate for the full picture.
Yes — credit cards quote APR (the cost of borrowing), while the same bank's savings accounts quote APY (the yield you earn). The rule of thumb: when money flows out of your pocket, look at APR; when it flows in, look at APY. Higher APY is better for savings; lower APR is better for debt.
Disclaimer: Calculator content is for education and planning only — not financial advice. Loan terms, rates, fees and tax rules vary by lender and country; confirm important figures with your lender or a licensed financial adviser before deciding.