Banks speak two languages: APR and APY. Knowing which one to use — and when — can mean the difference between picking the best account and leaving money on the table.
Walk into any bank or browse any savings account comparison site and you'll see both APR and APY thrown around. They're related, but they measure different things — and using the wrong one to compare accounts leads to bad decisions.
Here's a plain-English breakdown with examples.
APR (Annual Percentage Rate) is the simple annual interest rate, not accounting for compounding within the year. It answers: "what percentage does the bank charge or pay per year, before compounding?"
APY (Annual Percentage Yield) is the actual annual return after compounding is applied. It answers: "what do I actually earn (or owe) over a full year, with interest-on-interest included?"
For the same nominal rate, APY is always ≥ APR. The more frequently interest compounds, the bigger the gap.
Converting APR to APY:
APY = (1 + APR/n)n − 1
Where n = compounding periods per year (365 for daily, 12 for monthly, etc.)
| Compounding | APR | APY | Difference |
|---|---|---|---|
| Annually | 5.000% | 5.000% | $0 on $10k |
| Quarterly | 5.000% | 5.095% | $9.50 on $10k |
| Monthly | 5.000% | 5.116% | $11.60 on $10k |
| Daily | 5.000% | 5.127% | $12.70 on $10k |
On $10,000 the dollar differences are modest. On $500,000 over 5 years they compound into thousands.
Banks aren't neutral on this. They strategically choose which number to advertise based on what makes their product look better:
⚖️ Law requires it: The Truth in Savings Act (TISA) mandates that savings accounts and CDs disclose APY. The Truth in Lending Act (TILA) mandates that loans disclose APR. Know which law governs the product you're looking at.
Always compare APY to APY for savings products. If one account advertises a rate without specifying APY vs APR, ask — or use an APY calculator to convert it yourself.
Two accounts at the "same rate" can yield meaningfully different results:
| Account | Advertised Rate | Compounding | True APY | $50k for 3 years |
|---|---|---|---|---|
| Bank A | 5.00% APY | Daily | 5.000% | $57,881 |
| Bank B | 5.00% APR | Annually | 5.000% | $57,881 |
| Bank C | 4.95% APR | Daily | 5.073% | $57,997 |
Bank C has the lowest-looking APR but the highest yield — because daily compounding pushes its APY above the others.
Convert any APR to APY instantly with our APY calculator — or reverse-calculate the APR behind any advertised APY.
⚖️ Use the APY CalculatorCredit cards advertise APR, but interest compounds daily on unpaid balances. A 24% APR credit card has an effective APY of about 26.9% — that's what you're actually paying if you carry a balance year-round.
For mortgages, the APR is legally required to include fees and points, making it useful for comparison — but the monthly payment math still uses the nominal rate.
| Product | Look at | Why |
|---|---|---|
| Savings account | APY | Shows actual annual earnings |
| CD | APY | Required by law, includes compounding |
| Credit card | APR + compounding | Convert to APY to see real cost |
| Mortgage | APR (includes fees) | Best for comparing total loan cost |
| Auto loan | APR | Simple interest — APR ≈ true cost |
APY tells you what you'll actually earn. APR tells you the base rate before compounding. For savings, always use APY for comparisons. For loans, understand that the true cost is often higher than the APR suggests once you account for compounding and fees.
When in doubt, run the numbers — a few seconds with our APY calculator can save you from choosing the wrong account. Comparing CDs? Use our CD calculator to see exact maturity values side by side.