The short answer
- APR (annual percentage rate) is the yearly rate without compounding. On loans it often includes certain fees.
- APY (annual percentage yield) is the yearly rate with compounding: what you actually earn or pay over a year when interest is added to the balance.
For the same rate, APY is equal to or higher than APR. The more often interest compounds, the bigger the gap.
Which to compare: use APY for savings accounts and APR (plus fees) for loans and credit cards. Always compare like with like.
Why two numbers?
Interest is usually added to your balance in instalments: daily, monthly or quarterly. Once it is added, the next interest payment is calculated on the larger balance. That is compound interest.
APR ignores that effect; APY includes it.
Example: a savings account pays 5% APR, compounded monthly. Each month you earn 5% ÷ 12, about 0.4167%. Over a year that compounds to 5.12% APY.
The formula
APY = (1 + APR ÷ n)^n − 1
where n is the number of times interest compounds per year (12 for monthly, 365 for daily), and APR is written as a decimal.
| Stated APR | Compounding | APY |
|---|---|---|
| 5% | Yearly | 5.00% |
| 5% | Monthly | 5.12% |
| 5% | Daily | 5.13% |
| 24% | Monthly | 26.82% |
| 24% | Daily | 27.11% |
At savings-account rates the difference is small. At credit-card rates it is large: a card advertising 24% APR compounded daily costs about 27.1% a year on a balance you do not pay off.
On savings accounts: compare APY
When choosing a savings account, compare the APY (sometimes called AER, annual equivalent rate, in the UK and elsewhere). It already includes compounding, so accounts that compound at different frequencies can be compared directly.
Check also:
- Is it a promotional rate that drops after a few months?
- Are there conditions, such as a minimum balance or monthly deposits?
- Are there fees that cancel out the interest?
- Is it covered by your country's deposit insurance?
Our guide to high-yield savings accounts goes through these in detail.
On loans and mortgages: compare APR, then total cost
For loans, the APR is the standard comparison figure in many countries because it rolls certain fees into the rate.
- Mortgages and personal loans: the APR includes the interest rate plus some required fees, such as origination or arrangement fees. Two loans at the same interest rate can have different APRs because of fees.
- Short-term loans: a small fee on a loan of a few weeks can translate into a very high APR, which is exactly why the APR is useful: it reveals expensive borrowing.
- Total cost: for the clearest picture, ask for the total amount repayable over the life of the loan.
On credit cards: APR, and the real cost
Credit card APRs are high, and most compound daily. A few things to know:
- If you pay the full statement balance by the due date, most cards charge no interest on purchases, so the APR does not matter.
- If you carry a balance, the daily compounding pushes the real cost above the advertised APR.
- Cards often have different APRs for purchases, balance transfers and cash advances. Cash advances usually start charging interest immediately.
- An introductory 0% APR ends after a set period; know when.
For a comparison of card types, see our credit cards guide.
Quick conversions
- Monthly rate to APR: multiply by 12. A 2% monthly rate is 24% APR.
- Monthly rate to APY: (1.02)^12 − 1 = 26.82%.
- Rule of thumb: at rates under about 6%, APY is only slightly higher than APR. Above 15%, the gap becomes significant.
Key takeaways
- APR is the simple annual rate; APY includes compounding.
- APY is always equal to or higher than APR for the same rate.
- Compare APY (or AER) for savings and APR plus total cost for loans.
- Credit cards compound daily, so the real cost of carrying a balance exceeds the advertised APR.
This article is general information, not personal financial advice. Check the terms of any account or loan before you commit.