APR vs APY: what's the difference?
Short answer
APR is the annual cost of borrowing; APY is the annual return on savings. The mechanical difference is compounding: APY includes the effect of interest earning interest, while APR does not. That is why a savings account quoting 4.9% APY and a loan quoting 4.9% APR are not mirror images of each other.
This answers: What is the difference between APR and APY?
Key takeaways
- APR is quoted on credit; APY is quoted on deposits. Both are annual percentages, and they are not comparable.
- APY includes compounding. APR does not, which is why the same nominal rate produces a higher APY than APR.
- The more often interest compounds, the further APY rises above the nominal rate.
- US law requires banks to quote deposit returns as APY specifically so accounts can be compared on one number.
The one-line version
APR is a cost. APY is a return. If you see APR, someone is lending you money. If you see APY, you are lending money to a bank.
The mechanical difference
Both start from a nominal annual rate. The difference is what happens to interest once it is earned.
APY assumes interest is added to your balance and then earns interest itself. APR does not make that assumption — it annualizes a rate without compounding it.
APY = (1 + r ÷ n)^n − 1
At 5% nominal, compounded monthly, the APY is 5.12%. Compounded daily, 5.13%. Compounded once a year, exactly 5.00%. The gap between the nominal rate and the APY is the compounding, and nothing else. You can see it move by changing the frequency in the APY calculator.
| Nominal rate | Compounding | APY |
|---|---|---|
| 5.00% | Annually | 5.000% |
| 5.00% | Quarterly | 5.095% |
| 5.00% | Monthly | 5.116% |
| 5.00% | Daily | 5.127% |
The differences look trivial at a percentage level. On $50,000 over ten years, the gap between annual and daily compounding is real money.
Why the law separates them
Two different disclosure rules govern the two figures. The Truth in Lending Act (Regulation Z) governs how credit is advertised and requires an APR. The Truth in Savings Act (Regulation DD) governs deposit accounts and requires an APY.
They exist for the same reason — so consumers can compare offers on a single standardized number rather than reverse-engineering rate-and-fee combinations — but they standardize different things. APR standardizes cost including certain fees. APY standardizes return including compounding.
Compounding cuts both ways
Compounding is not exclusive to savings. Credit card interest compounds too — most issuers apply a daily periodic rate, so unpaid interest joins the balance and starts accruing interest of its own. Card issuers simply are not required to express that as a compounded annual figure.
So on the same nominal rate:
- On savings, compounding means you end up with more than the headline rate suggests.
- On a carried card balance, compounding means you pay more than the headline APR suggests.
The credit card interest calculator shows the second effect directly: switching accrual from monthly to daily raises the total interest on the same APR and the same payment.
What to compare against what
| You want to know | Look at | Not at |
|---|---|---|
| Which savings account pays more | APY | The nominal rate |
| Which loan costs less | APR, at the same term and amount | The interest rate alone |
| What a card balance really costs | APR plus the annual fee | The APR alone |
| Whether a CD beats a savings account | APY on both | The term length alone |
Never compare an APR to an APY and conclude anything. A 5% APR loan and a 5% APY savings account do not cancel out.
Run the numbers
APY calculator
What is the APY on this rate?
APR calculator
What is the real APR on this loan?
Compound interest calculator
What will my savings grow to?
Sources
- Truth in Savings Act (Regulation DD)Consumer Financial Protection Bureau
- What is a certificate of deposit (CD)?Consumer Financial Protection Bureau
- Consumer ResourcesFederal Deposit Insurance Corporation
Educational information only. This page explains how something works in the United States. It is not financial advice and does not take account of your circumstances. Rates, fees and eligibility change without notice — check the provider’s own terms before you act.
For free, impartial guidance, see Consumer Financial Protection Bureau. To complain about a firm, contact the CFPB complaint database.
Related guides
What Is APR? The Real Cost of Borrowing, Explained
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