APY vs APR: what the difference costs you
By FinTools Content updated
Banks quote APY on the money they pay you and APR on the money they lend you, and the two are not the same kind of number. Compounding matters, and loan APR can also include fees that a nominal interest rate leaves out. This guide separates those concepts before showing a simplified conversion example.
The 10-second answer
APY (annual percentage yield) expresses annualized deposit interest with compounding under the disclosure assumptions. APR (annual percentage rate) expresses borrowing cost and can include required fees. A nominal-rate-to-APY formula does not convert a fee-inclusive loan APR into a complete borrowing cost. See the CFPB APY rules and CFPB explanation of interest rate versus APR.
Why APY is more than the nominal rate
A savings account does not pay its annual rate once a year in one lump. It divides the rate into daily or monthly slices, and each slice earns on the interest already credited. A 5% nominal rate compounded monthly therefore yields about 5.12% over a full year — that 5.12% is the APY. The more frequent the compounding, the bigger the gap, though the effect levels off quickly: daily compounding adds only a basis point or two over monthly. The mechanics are unpacked in How compound interest works.
A worked savings example
Suppose two banks advertise "5%" on a $20,000 deposit. Bank A means a 5.00% APY; after one year you have $21,000. Bank B means a 5% nominal rate compounded daily, which is a 5.13% APY; after one year you have about $21,026. Same advertised digit, $26 of difference — small in one year, but the gap compounds too. This assumes constant rates, retained interest, and no fees or withdrawals. The APY calculator converts nominal interest rates and APY in either direction.
APR on loans and credit cards
Loan APR can differ from the interest rate because of included fees. For a purely mathematical example,
a 24% nominal annual interest rate applied monthly is 2% per month. If all interest is added to the
balance with no payments for a year, 1.02^12 − 1 is about 26.8%. This is not a credit-card
repayment schedule: actual billing, payments, fees, and grace-period conditions affect the cost.
The debt payoff calculator uses a simplified monthly model.
Which number to compare when shopping
For savings accounts and CDs, compare APY against APY; it already includes each bank's compounding schedule. Also compare fees, balance requirements, rate changes, and withdrawal restrictions. For loans, compare APRs for similar loan types and terms, alongside the payment schedule and total cost. A savings APY and a loan APR alone do not describe equivalent offers.
Run your own numbers
The APY calculator converts any nominal rate to its APY across annual, monthly, daily, and continuous compounding — and back again — so you can put two mismatched offers on the same mathematical footing. It does not calculate loan APR from fees and cash flows.