APR vs APY: What's the Difference?
APR and APY look almost the same, but they can describe very different real costs and returns. The gap between them comes down to one thing: compounding.
What APR means
APR (annual percentage rate) is the plain yearly rate, before compounding is taken into account. It is the number most loans and credit cards advertise, because it looks smaller.
What APY means
APY (annual percentage yield) includes the effect of compounding, the interest that itself earns interest during the year. Because of that, APY is always a little higher than the APR it comes from, and it reflects what you actually earn or pay.
A quick example
A 12% APR compounded monthly works out to an APY of about 12.68%. Same headline rate, but the APY shows the true yearly figure once each month's interest starts earning too.
Which one to use
Savings accounts usually advertise APY (it looks bigger and is the honest return). Loans usually advertise APR (it looks smaller). The trap is comparing one product's APR against another's APY. Always compare like with like, and convert if you need to with the APY Calculator.
See it in numbers
Try the APY Calculator to turn any APR into its true APY, and the Compound Interest Calculator to watch compounding at work.
Frequently asked questions
Is APY always higher than APR?
Yes, whenever interest compounds more than once a year. They are equal only with simple annual compounding.
Which should I compare for a savings account?
Compare APY to APY. It reflects what you actually earn once compounding is included.
How do I turn APR into APY?
Apply the compounding: APY = (1 + APR/n) to the power n, minus 1, where n is how many times a year it compounds. Our APY calculator does it for you.