APY vs APR: Which Number Should You Compare?

By Nathan Hays · Updated July 31, 2026

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.

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.

How APY folds compounding into one number

The conversion is APY = (1 + r/n)^n - 1, where r is the nominal annual rate and n is the number of compounding periods per year. (The mechanics behind that exponent are unpacked in how compound interest works.) The table below runs three illustrative nominal rates through every schedule a US bank commonly uses, computed with the same engine that drives the calculator:

Two patterns fall out. First, each row is narrow: even at 8% nominal the spread from annual to daily is 0.328 of a percentage point, and at 2% it is 0.020. Second, the steps shrink as you move right. At 5% nominal, annual to quarterly adds 0.095 of a point, quarterly to monthly adds 0.021, and monthly to daily adds 0.011. That is the whole reason one APY figure is enough to shop with: once compounding is folded in, the schedule has nothing left to tell you.

Comparing two accounts with different schedules

Here is the comparison savers actually face. Two illustrative accounts:

• Account A: 4.25% nominal, compounded daily → 4.341% APY
• Account B: 4.35% nominal, compounded annually → 4.350% APY

Account A holds the marketing advantage: daily compounding, the schedule that sounds generous. It lifts A's headline rate by 0.091 of a point. But B starts a tenth of a point ahead, and that head start is larger than everything daily compounding can add. On $25,000 left alone for a year, A finishes at $26,085.34 and B at $26,087.50, so B wins by $2.16. Stretch it to five years and B is still ahead, by $12.82 ($30,931.59 against $30,918.77).

The margin is thin, and that is the point: at these rates a compounding schedule is worth about a tenth of a percentage point, so it can only ever break a near-tie. You never have to reason it through, because both APYs were produced under the same rule. Compare 4.341% to 4.350% and the question is settled.

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

Why banks quote APY on savings but APR on loans

The split is not a marketing preference; it is written into two different federal rules. Deposit accounts fall under Truth in Savings, implemented as Regulation DD, which requires the advertised yield to be an APY calculated the standardized way. Consumer credit falls under Truth in Lending, implemented as Regulation Z, which governs how annual percentage rates are disclosed on credit products.

There is a symmetry in which number each rule reached for. On a deposit, compounding makes the honest figure larger than the nominal rate, and APY is the larger figure. On a loan, required fees make the honest figure larger than the quoted interest rate, and APR is the larger figure. In both cases the mandated number is the one that is harder for the institution to flatter, which is what makes each of them safe to compare across offers. The catch is that they are not measuring the same quantity, so they are not interchangeable.

The trap: comparing an APR to an APY

Because APY includes compounding and APR does not, putting the two side by side compares different quantities. How much that costs you depends almost entirely on the rate, and it grows fast.

At savings rates the error is small. A rate quoted as 4.00% nominal with daily compounding works out to a 4.081% APY, so treating that "4.00%" as though it were already an APY understates the account by 0.081 of a point. On $50,000 over five years that is $61,069.47 against $60,832.65, a gap of $236.82. Real money, but rarely decision-changing.

At card rates the error is large. A credit card quoting 24% APR that compounds daily costs 27.11% over a year of carried balance, because the APR figure never included the compounding. Carry $5,000 for a year and the sticker implies $1,200 of interest; daily compounding produces $1,355.74, which is $155.74 more, roughly 13% above what the headline number describes.

A rough rule falls out of this: the compounding correction scales with the square of the rate, so it is a rounding error on a savings account and a genuine cost on revolving debt. When you hold an APR and want to know what a year will actually cost, convert it the way APY is computed. When you hold an APY and want to compare it against a loan, there is no way back, because the loan's APR bundles in fees that no formula can unpick.

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

Related reading: How compound interest works · Daily vs. monthly compounding · CD calculator · Inflation and compound interest · 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.