APR (annual percentage rate) is the yearly rate stated without counting compounding; on a loan it also folds in certain fees. APY (annual percentage yield) is the rate you actually earn or pay over a year once interest is added on top of interest. When you save, compare APY: it is the true yearly return. When you borrow, compare APR: it is the fuller cost, and for credit cards the compounding behind it works against you.
At a glance
| APR | APY | |
|---|---|---|
| Includes compounding | No | Yes |
| Typically used for | Loans, mortgages, credit cards | Savings accounts, CDs, money-market accounts |
| Includes fees | On loans, usually some | No |
| Compared with the stated rate | Equal or higher on loans | Equal or higher than the stated rate |
The formula
APY = (1 + APR ÷ n)ⁿ − 1, where n is the number of compounding periods per year. For a 5% APR:
| Compounding | Periods per year | APY |
|---|---|---|
| Annually | 1 | 5.000 % |
| Quarterly | 4 | 5.095 % |
| Monthly | 12 | 5.116 % |
| Daily | 365 | 5.127 % |
The more often interest compounds, the higher the APY, but the gain flattens quickly. A 6% APR compounded monthly is an APY of 6.168 %. On a 10,000 deposit at 5% APR compounded monthly, the balance after one year is 10,511.62.
Use the APY Calculator to convert in either direction, the APR Calculator to see the real APR of a loan including fees, and the Compound Interest Calculator for multi-year growth.
Which should you choose?
- Choosing a savings account or CD: compare APY across banks.
- Choosing a loan or card: compare APR, and check whether fees are included.
- Comparing a loan APR to a savings APY: convert them to the same basis first.
- Carrying a credit-card balance: remember that daily compounding makes the effective cost higher than the stated APR.
For the underlying idea see How Compound Interest Works, and APR and APY for definitions.