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Finance Calculators

APR vs. APY: Why the Same Rate Can Mean Two Different Things

Last updated: 2026-06-13

APR and APY can describe the same nominal interest rate yet produce different dollar amounts, because only one of them accounts for compounding. APR is the simple annual rate. APY folds in how often interest compounds. For anything you earn, compare APY; for anything you borrow, compare APR — and watch the fees.

The core difference

  • APR (annual percentage rate) is the stated yearly rate without compounding. A 12% APR is simply 1% per month, summed.
  • APY (annual percentage yield) is the effective yearly rate after compounding. At 12% nominal compounded monthly, the APY is about 12.68%, because each month's interest itself earns interest.

The more frequently interest compounds — daily beats monthly beats annually — the larger the gap between APR and APY grows.

Which rate to compare, and when

For savings products like a CD or high-yield savings account, banks advertise APY because it is the honest picture of what you will actually earn. Compare APY to APY across accounts. The CD interest calculator lets you enter either APY directly or an APR plus a compounding frequency and reconciles the two.

For loans, lenders quote APR, which (by regulation) bundles certain fees into the rate so you can compare the true cost of borrowing. When you compare a loan's monthly payment, the APR is the number that matters.

Credit cards: a special case

Credit card issuers quote APR, but interest is typically calculated daily on your average balance — so a carried balance effectively compounds, and the cost you feel is closer to an APY. Carrying a balance is the most expensive form of consumer borrowing for exactly this reason.

Try the toolCredit Card Interest & Minimum Payment CalculatorCalculate credit card interest at your APR and see how long minimum payments take to pay off your balance — total interest, months, and the payoff trap.

How compounding frequency changes the result

  1. Start with the nominal annual rate (the APR).
  2. Divide it by the number of compounding periods per year to get the periodic rate.
  3. Apply that periodic rate each period, letting interest accrue on prior interest.
  4. The resulting effective annual figure is the APY.

Frequently asked questions

Is a higher APY always better for savings?

Yes, when comparing similar products — APY already reflects compounding, so a higher APY means more interest earned per year on the same balance.

Why do lenders quote APR instead of APY?

US lending rules require APR disclosure so borrowers can compare loans on a consistent basis, including certain fees. APR understates the effect of compounding, so the true cost can be slightly higher.

What makes APR and APY differ for the same rate?

Compounding frequency. With no compounding they are equal; the more often interest compounds within a year, the more APY exceeds APR.

Does a credit card's APR include compounding?

The quoted APR does not, but most issuers compute interest on a daily balance, so a carried balance compounds in practice and costs more than the simple APR implies.

Tools in this guide