APY vs APR: What's the Difference?
Learn how APY includes compounding and APR doesn't, how to convert between them, and which to compare for savings and for loans, with a free APY calculator.
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Free tool: APY CalculatorSavings accounts advertise an APY; loans and credit cards advertise an APR. They sound alike, but they measure different things, and mixing them up makes accounts and loans hard to compare. This guide explains both, shows how to convert between them, and when each matters, using the free APY Calculator.
The short version
- APR (annual percentage rate) is the yearly interest rate without compounding. On loans, it also includes certain fees.
- APY (annual percentage yield) is the yearly return including compounding: interest earning interest during the year.
With monthly compounding, a 5% APR is a 5.116% APY, because each month's interest earns interest for the rest of the year.
Converting APR to APY
APY = (1 + APR ÷ n)^n − 1
where n is the number of compounding periods per year. At 5%:
| Compounding | APY |
|---|---|
| Yearly | 5.000% |
| Monthly | 5.116% |
| Daily | 5.127% |
On a $10,000 deposit, monthly compounding earns $511.62 in the first year, and daily compounding $512.67: only about a dollar more. The rate matters far more than how often it compounds.
Converting APY to APR
APR = n × ((1 + APY)^(1 ÷ n) − 1)
A 5% APY compounded monthly corresponds to a 4.889% APR. You might need this when a product quotes an APY but a formula or another quote uses the nominal rate.
Which one to compare
- Savings accounts and CDs: compare APYs. US banks are required to disclose the APY on deposit accounts, so it's the fair, like-for-like number.
- Loans and credit cards: compare APRs. A loan's APR includes some fees, so it's a better measure of cost than the interest rate alone; the APR Calculator works out a loan's true APR including fees.
- Never compare an APY with an APR. An account at 5% APR compounded daily actually pays more than one at 5.1% APY.
How long-term growth differs
Small differences add up over time. At 5% compounded monthly, $10,000 grows to about $16,470 in 10 years, versus $16,289 at an APY of exactly 5%. That's because 5% APR monthly is really 5.116% a year.
How to use the APY Calculator
- Open the APY Calculator.
- Choose the conversion: Interest rate → APY or APY → interest rate.
- Enter the rate and choose the compounding frequency, from yearly to continuous.
- Enter a deposit and the number of years to see the effect in dollars.
- Read the results: the APY (or rate), the interest in the first year, the balance after the years you chose, and a comparison of different compounding frequencies, with a growth chart.
Frequently asked questions
What's the difference between APY and APR?
APR is the annual interest rate without compounding (plus some fees, for loans); APY includes the effect of compounding during the year. For savings, APY is the number to compare; for loans, APR.
Is a higher APY always better?
For savings, yes, all else being equal. Check the conditions too: some high APYs apply only up to a balance limit, for an introductory period, or with monthly requirements.
Does daily compounding make a big difference?
Not much. At 5%, daily compounding gives 5.127% APY versus 5.116% for monthly, about $1 a year more on $10,000.