APY vs APR: Which Number Should You Compare?
Two three-letter rates, two opposite sides of the bank counter. APY (annual percentage yield) tells you what your deposits actually earn once compounding is counted. APR (annual percentage rate) tells you what borrowing actually costs once required fees are counted. Mixing them up is the most common rate confusion in personal finance, and banks quote whichever one flatters the product. Model the deposit side with the free compound interest calculator.
In short: saving? Compare APYs, the bigger the better. Borrowing? Compare APRs, the smaller the better. Each is designed so that a single number lets you compare offers across banks.
APY: the deposit-side number
APY answers one question: if I leave money in this account for a year, what percentage will it actually grow? It folds the compounding schedule into the rate, so a 5% nominal rate compounded monthly is a 5.116% APY and compounded daily is 5.127%. Federal Truth in Savings rules (Regulation DD, Appendix A) define exactly how banks must calculate it, which is why comparing APYs across savings accounts and CDs is safe: the math behind the number is standardized. Our daily vs monthly guide shows why the compounding schedule itself barely matters once APY is in hand.
APR: the borrowing-side number
APR answers the mirror question: if I borrow, what will a year of this debt cost me? For loans it bundles required fees (origination, certain closing costs) with the interest rate, which is why a mortgage's APR runs higher than its quoted rate. For credit cards, the APR is essentially the interest rate, and the CFPB explains how card APRs are applied on its credit card APR page. One quirk: APR does NOT include compounding. A card with a 24% APR that compounds daily actually costs more than 24% over a year if you carry the balance (about 27.1% effective).
Side by side
| APY | APR | |
|---|---|---|
| Applies to | Deposits: savings, CDs, money market | Borrowing: loans, cards, mortgages |
| Includes compounding? | Yes | No |
| Includes fees? | No (deposit accounts rarely have them) | Yes, required loan fees |
| You want it... | Higher | Lower |
| Defined by | Truth in Savings (Regulation DD) | Truth in Lending (Regulation Z) |
The same math, working for or against you
Both numbers exist because compounding makes a bare "interest rate" ambiguous. On the deposit side that ambiguity would let banks advertise inflated-sounding rates, so APY standardizes upward honesty. On the borrowing side the hidden costs are fees and daily compounding, so APR standardizes the cost picture instead. Same compound-interest engine underneath; see how compound interest works for the mechanics, and use the calculator to see what any APY does to your savings over time.
Frequently asked questions
Is APY or APR higher for the same nominal rate?
APY is at or above the nominal rate because it adds compounding (5% nominal at monthly compounding is 5.116% APY). A loan's APR is at or above its nominal rate too, but for a different reason: it adds required fees, not compounding.
Why does my savings account advertise APY but my loan advertises APR?
Because each is the legally standardized number for that product type: Truth in Savings rules require APY on deposit accounts, and Truth in Lending rules require APR on credit. It also happens that each rule makes the advertised number the honest one for comparison shopping.
Can I convert between APY and APR?
For rates without fees, yes: APY = (1 + r/n)^n - 1, where r is the nominal annual rate and n the compounding periods per year. There is no general formula back from a loan APR to a nominal rate, because APR mixes in fees that depend on the specific loan.
Related reading: How compound interest works · Daily vs. monthly compounding · CD calculator · FAQ
General information, not financial advice. Rates, fees, and account terms vary by institution. Confirm the APY or APR and its conditions with the bank before opening any account or loan.
← Back to the calculator