APR vs APY — What's the difference?
Annual Percentage Rate (APR) is the stated interest rate without accounting for compounding within the year. Annual Percentage Yield (APY) — also called the Effective Annual Rate (EAR) — reflects the actual return after compounding is applied. The more frequently interest compounds, the wider the gap between APR and APY.
For savings accounts and investments, APY is what you actually earn. For loans and credit cards, lenders often advertise APR — the true cost is higher once compounding is factored in. This calculator converts between the two so you're always comparing apples to apples.
How to use this calculator
Enter the nominal APR and select the compounding frequency (daily, monthly, quarterly, etc.). The calculator returns the effective APY. Use it when comparing savings account offers, evaluating loan costs, or converting between rate formats on financial statements.
Frequently Asked Questions
Is APY always higher than APR?
Yes, as long as compounding occurs more than once per year. With annual compounding, APY equals APR. With daily compounding, a 5% APR becomes approximately 5.13% APY. The difference grows larger at higher rates and more frequent compounding.
What compounding frequency is most common?
High-yield savings accounts and money market accounts typically compound daily. CDs often compound daily or monthly. Bonds usually compound semi-annually. Credit cards compound daily. Always check the terms — lenders are required to disclose the APY in the U.S. under the Truth in Savings Act.
How is APY calculated from APR?
APY = (1 + APR ÷ n) ^ n − 1, where n is the number of compounding periods per year. For example, 6% APR compounded monthly: (1 + 0.06/12)^12 − 1 = (1.005)^12 − 1 ≈ 6.168% APY.
Why do banks advertise APY on savings but APR on loans?
It's a marketing convention. APY sounds higher on savings accounts (good for the bank's pitch), while APR sounds lower on loans (also good for the bank's pitch). As a consumer, always convert to APY to make accurate comparisons — this calculator does exactly that.