APY vs APR: what the difference costs you

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. The difference is compounding — and depending on which side of the balance sheet you are on, it either works for you quietly or against you expensively.

The 10-second answer

APY (annual percentage yield) is what a deposit actually earns in a year, with compounding included. APR (annual percentage rate) is a borrowing rate quoted without compounding, so the true annual cost of carrying a balance is usually higher than the APR. Compare savings offers by APY and loan offers by APR — and never compare an APY directly against an 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. US deposit regulation requires banks to state the APY precisely so accounts can be compared directly; when an offer only shows one of the two numbers, the APY calculator converts in either direction.

APR on loans and credit cards

A loan APR is the periodic rate scaled up to a year without compounding. A credit card at 24% APR charges about 2% per month — but if you carry the balance, the unpaid interest joins the principal and next month's 2% applies to that too. Carried for a full year, 24% APR compounds to an effective annual cost of about 26.8%. That is why card debt grows faster than the quoted APR suggests, and why paying inside the grace period, where no interest accrues at all, is worth so much. To see what it takes to unwind a compounding balance, run your numbers through the debt payoff calculator.

Which number to compare when shopping

For savings accounts and CDs, compare APY against APY; it already includes each bank's compounding schedule, so the higher APY genuinely pays more on the same deposit. For loans, compare APR against APR for the same loan type — by regulation it includes certain financing costs, making it a fairer comparison than the bare interest rate. The mistake to avoid is crossing the streams: a 5% APY savings account and a 5% APR loan are not equivalent offers, because one number has compounding inside it and the other does not.

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 footing before choosing.