APY vs APR: What's the Difference?
APR and APY are both ways of expressing interest rates, but they measure different things. Confusing them can lead to poor financial decisions.
Annual Percentage Rate (APR)
APR is the simple annual interest rate, without accounting for compounding. It is commonly used for loans, credit cards, and mortgages.
Annual Percentage Yield (APY)
APY accounts for compounding frequency and represents the actual return you earn or pay in one year. It is always higher than APR (when compounding occurs more than once a year).
The Formula
APY = (1 + APR/n)n - 1
Example
A savings account with 5% APR compounded monthly:
APY = (1 + 0.05/12)12 - 1 = 5.116%
When to Use Each
- Comparing savings accounts: Always use APY — it shows the true return.
- Comparing loans: Always use APR — it shows the true cost.
Use our compound interest calculator to model returns using either APR or APY inputs.