APR vs APY: What Is the Difference?

APR is a nominal rate. APY is an effective rate that includes compounding.
The more often interest compounds, the wider the gap between the two.
Compare loans using APR and savings accounts using APY.
A loan APR often includes certain fees, so it can be higher than the interest rate.

What APR and APY mean

APR stands for annual percentage rate. It expresses the yearly cost of borrowing as a percentage. It is a nominal rate, meaning it is the stated rate before any compounding within the year is counted.

APY stands for annual percentage yield. It expresses how much a balance actually grows over a full year once compounding is included. It is an effective rate.

Compounding means interest is added to the balance, and later interest is calculated on the larger balance. If you are new to the idea, read how compound interest works first.

A simple way to remember it: APR tells you the rate, APY tells you the result.

Three points that often cause confusion

Interest rate vs APR: on a loan, the interest rate is the charge on the balance alone. The APR may add certain fees on top, as explained below.
APY assumes a full year: it shows what you would earn if the money and its interest stayed in the account for twelve months at the same rate.
Rates can change: a variable rate, or an introductory rate that ends after a set period, means the quoted figure may not hold for the whole time you have the product.

How compounding turns one into the other

To convert a nominal yearly rate into an APY, you need to know how many times a year interest is added. The formula is:

APY = (1 + r / n)^n - 1

r is the nominal yearly rate as a decimal.
n is the number of compounding periods per year.

Worked example with a 12% nominal rate compounded monthly:

Monthly rate: 12% / 12 = 1%.
Growth factor for the year: 1.01 multiplied by itself 12 times = 1.1268.
Subtract 1: 0.1268, or an APY of 12.68%.

So $1,000 at a 12% nominal rate compounded monthly becomes $1,126.83 after a year, not $1,120. The APY calculator does this conversion for any rate and frequency.

The effect of compounding frequency

The same nominal rate produces a different APY depending on how often interest compounds. Here is a 12% nominal rate at several frequencies.

Compounding	Periods per year	APY
Yearly	1	12.00%
Twice a year	2	12.36%
Quarterly	4	12.55%
Monthly	12	12.68%
Daily	365	12.75%

Two things stand out. First, when interest compounds once a year, the nominal rate and the APY are the same. Second, each step up in frequency adds less than the one before. Going from yearly to monthly adds 0.68 percentage points. Going from monthly to daily adds only 0.07.

The gap also shrinks at lower rates. A 6% nominal rate compounded monthly has an APY of about 6.17%.

In practice this means compounding frequency is worth checking but rarely decides the matter. A slightly higher nominal rate will usually beat a more frequent schedule.

Which rate to compare for loans and savings

Use the figure that matches the product, and compare like with like.

Savings accounts and certificates of deposit: compare APY. It already includes compounding, so two accounts with different schedules can be judged on one number. A $10,000 balance at a 5% APY earns $500 over a year. The CD calculator shows growth over a fixed term.
Loans and credit cards: compare APR, and make sure each quote is for the same loan amount, term and type of rate.

Never compare an APR on one product with an APY on another. The APY will look higher simply because of how it is calculated.

Keep in mind that debt compounds too. A card with a 24% APR charged monthly applies 2% a month. If a balance were left untouched for a year, the effective yearly cost would be about 26.82%, which is higher than the APR.

Fees inside APR

On many loans, APR is not just the interest rate. It also folds in certain required charges, such as origination or processing fees, and spreads them over the life of the loan. This is why a loan can have a 6% interest rate and a higher APR.

A simplified example shows the idea. Suppose you borrow $10,000 for one year at 6% interest, repaid in a single payment at the end, with a $200 fee taken out up front.

Cash you actually receive: $10,000 - $200 = $9,800.
Amount you repay: $10,000 + $600 interest = $10,600.
Total cost: $10,600 - $9,800 = $800.
Cost as a share of cash received: $800 / $9,800 = about 8.16%.

The interest rate is 6%, but the true yearly cost is about 8.16%. That second figure is what APR is designed to show.

Which fees are counted varies by loan type and by place, so two APRs are only directly comparable when they follow the same rules. The APR calculator lets you add fees to a loan and see the effect.

A quick checklist for comparing offers

Check whether the quoted figure is an APR or an APY.
For savings, line up the APYs and check any conditions, such as minimum balances.
For loans, line up the APRs for the same amount and term.
Ask which fees are included in the APR and which are charged separately.
Look at the total cost in dollars as well as the percentage.

The percentage is a useful summary, but the dollar total is what you pay or earn. A loan calculator turns a rate and term into a payment and a total, which makes offers easier to compare side by side.

Try it with your own numbers

Frequently asked questions

Is APY always higher than APR?

For the same stated rate, APY is equal to APR when interest compounds once a year and higher when it compounds more often. The gap grows with the rate and with the number of compounding periods. However, a loan APR that includes fees can be higher than the plain interest rate for a different reason.

Why do lenders quote APR and banks quote APY?

APR is the common standard for showing the yearly cost of borrowing, including certain fees. APY is the common standard for showing what a deposit earns with compounding. Each figure suits its product. It also means the borrowing figure leaves compounding out while the saving figure includes it, so they should not be compared directly.

How do I convert APR to APY?

Divide the nominal yearly rate by the number of compounding periods, add 1, raise the result to the power of the number of periods, then subtract 1. For example, 12% compounded monthly gives 1.01 to the power of 12, which is 1.1268. Subtracting 1 gives an APY of 12.68%.

Does APR include all loan costs?

Not always. APR usually includes interest and certain required fees, but the exact list depends on the type of loan and local rules. Costs such as late fees or optional add-ons are often left out. When comparing loans, ask what each APR covers and look at the total dollar cost over the full term.

This guide is general education, not financial advice. Rules of thumb vary by lender, industry and country.