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 is APR?
APR (annual percentage rate) is the plain yearly rate. On borrowing it also folds in compulsory fees, and the US Consumer Financial Protection Bureau calls the APR a broader measure of borrowing cost than the interest rate. In its basic form, though, it does not account for compounding within the year, which is why loans and credit cards advertise it: it looks smaller.
What is APY?
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.
The formula and a worked example
To turn an APR into an APY: APY = (1 + APR/n) to the power n, minus 1, where n is how many times a year it compounds. Take a 12% APR: compounded once a year the APY is 12%, monthly it is about 12.68%, and daily about 12.75%. Same headline rate, but the more often it compounds, the higher the true yearly figure once each period's interest starts earning too.
Which one should you 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.
Why it matters on a credit card
Card rates are usually quoted as an APR, but interest compounds, often daily, on any balance you carry. That means the effective rate you actually pay, the APY, is higher than the APR on the statement. It is one more reason clearing the balance in full each month, so no interest compounds at all, is so much cheaper than carrying it.
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.
What is the difference between APR and APY?
APR is the plain yearly rate (and on loans includes fees) without in-year compounding; APY includes compounding, so it is a little higher. You borrow at an APR and save at an APY.
Which should I compare for a savings account?
Compare APY to APY. It reflects what you actually earn once compounding is included, so it is the honest number for savings.
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. A 12% APR compounded monthly is about 12.68% APY. Our APY calculator does it for you.