What is the difference between APR and APY?

APR (Annual Percentage Rate) is the nominal interest rate without compounding — the stated rate. APY (Annual Percentage Yield) accounts for compounding and represents the actual amount earned or paid over a year. A savings account at 6% APR compounding monthly has an APY of 6.168%. APY is always equal to or higher than APR. The more frequent the compounding, the larger the gap.

Why do savings accounts show APY but credit cards show APR?

Savings institutions advertise APY because it appears higher and sounds more attractive. Credit card issuers and mortgage lenders use APR because it appears lower and minimizes the apparent cost. The Truth in Lending Act (TILA) requires lenders to disclose APR, not APY, for loans. The Truth in Savings Act requires deposit institutions to disclose APY. Always convert to the same basis when comparing financial products.

How often does credit card interest compound?

Most credit cards compound daily. A 20% APR compounding daily results in an APY of approximately 22.13%. This is why carrying a balance month-to-month is so costly — you are effectively paying 22% annually on the outstanding balance, not just 20%. Paying the full statement balance each month avoids interest entirely; only carried balances accrue this compounded interest.

Does compounding frequency matter much in practice?

At typical consumer rates, the difference between monthly and daily compounding is small but measurable. At 5% APR: monthly compounding yields 5.116% APY; daily compounding yields 5.127% APY — a difference of only 0.011 percentage points on $10,000 is about $11/year. For large balances or high rates (like credit card debt at 20%+), the frequency difference becomes more significant over time.

When is APY more important than APR?

APY is the more important rate when comparing savings products (savings accounts, CDs, money market accounts) because it reflects exactly how much your money grows in one year. When comparing loans, APR is the required disclosure, but understanding the effective APY helps you see the true cost. For mortgages, lenders also disclose a separate APR that includes fees — this is a different calculation than the nominal interest rate APR-to-APY conversion.

Why is APY higher than APR on savings accounts?

APY is higher than APR on savings accounts because APY includes the effect of compounding — earning interest on previously earned interest. If a bank pays 5% APR with monthly compounding, your interest each month earns interest in subsequent months, producing a total annual yield of 5.116% APY. The more frequently interest is compounded, the larger the gap between APR and APY.

Which rate should I use when comparing mortgages?

When comparing mortgages across lenders, use the mortgage APR disclosed under TILA — not the interest rate alone. The mortgage APR incorporates origination fees, discount points, and certain other closing costs spread over the loan term, making it a truer cost-of-borrowing metric. Two lenders quoting the same interest rate but different fees will have different APRs, revealing the true cost difference. Always request the Loan Estimate for each lender and compare line-by-line APRs.

How much difference does daily vs. monthly compounding make on a savings account?

For typical savings account balances, the difference between daily and monthly compounding is small but real. On a $50,000 balance at 5% APR: monthly compounding earns $2,558/year (5.116% APY); daily compounding earns $2,564/year (5.127% APY) — a difference of about $6/year. Over 10 years with reinvestment, the gap grows to roughly $75. For debt at high rates, the difference is larger: a 24% APR credit card earns approximately 26.9% APY compounding monthly vs. 27.1% APY daily.

APR vs APY Calculator — Convert & Compare Rates

Converts APR to APY (or APY to APR) for any compounding frequency to compare loans and savings accounts.

How to Use the APR vs. APY Calculator

The APR vs APY calculator on this page converts between Annual Percentage Rate and Annual Percentage Yield for any compounding frequency. Select your conversion direction: APR → APY to find the effective yield from a stated nominal rate, or APY → APR to find the nominal rate from an advertised yield. Enter the rate and select the compounding frequency (Daily, Monthly, Quarterly, Semi-Annual, or Annual). Optionally enter a principal amount to see the dollar difference between the two rates over one year.

APR vs. APY: Key Differences Explained

APR (Annual Percentage Rate) is the simple annual interest rate without accounting for compounding within the year. If a bank says your savings account earns 6% APR with monthly compounding, the 6% is the APR. APY (Annual Percentage Yield) is the effective rate after compounding: (1 + APR/n)^n − 1, where n is compounding periods per year. At 6% APR with monthly compounding, APY = (1 + 0.06/12)^12 − 1 = 6.168%.

The difference may seem small for typical savings rates, but it matters when comparing across products and for loan products at higher rates. A credit card at 24% APR compounding daily has an APY of approximately 27.11% — a nearly 3 percentage point gap that represents real money on large, carried balances.

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How Compounding Frequency Affects Your Rate

More frequent compounding generates more interest for savers and costs more for borrowers. The formulas: APR → APY: APY = (1 + APR/n)^n − 1. APY → APR: APR = n × ((1 + APY)^(1/n) − 1). At 5% APR: Daily compounding (n=365) yields 5.127% APY; monthly compounding (n=12) yields 5.116%; quarterly (n=4) yields 5.095%; semi-annual (n=2) yields 5.063%; annual (n=1) yields 5.000% (APR = APY when compounding annually).

For savings, prefer daily compounding over monthly when rates are equal. For loans, daily compounding is worse than monthly. However, the differences at typical rates (2–8%) are relatively modest. What matters more is the overall rate — a 5.5% APY beats a 5.0% APY with daily compounding, regardless of frequency.

APR and APY for Loans vs. Savings

For savings products (savings accounts, CDs, money market accounts), compare APY to APY. This is the actual return on your money and accounts for compounding. Our CD calculator shows APY-based returns for certificate of deposit terms. For loan products, lenders disclose APR by law. To find the true annual cost, convert APR to APY using this calculator — especially for credit cards and other daily-compounding debt.

Note that for mortgages, lenders must disclose a separate “mortgage APR” that includes origination fees, discount points, and certain other costs spread over the loan term. This mortgage APR is a different concept from the simple APR-to-APY conversion — it is a fee-inclusive effective rate, not just a compounding adjustment. Use our mortgage calculator to model monthly payments, and treat the mortgage APR disclosure as the true cost comparison metric across lenders.

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Real-World Examples: Credit Cards, Mortgages, and CDs

Credit cards: A 20% APR compounding daily equals a 22.13% APY. On a $5,000 balance carried for a full year without additional charges, you pay approximately $1,107 in interest (at APY), not $1,000 (at simple APR). Paying even $50 above the minimum monthly cuts the balance meaningfully and saves hundreds.

High-yield savings: A 4.8% APY savings account is advertising the already-compounded yield. If the bank compounds monthly, the nominal APR is approximately 4.695%. You earn $480 on $10,000 over one year at this APY, regardless of how the compounding works — APY already accounts for it.

CDs: A 1-year CD at 5.0% APY with monthly compounding would have an APR of approximately 4.889%. Since the CD term is exactly 1 year, you earn exactly 5.0% — APY is the right metric. Compare our compound interest calculator for multi-year growth modeling with selectable compounding frequency.

When to Use APR and When to Use APY

A simple rule: use APY when evaluating how much money you earn (savings accounts, CDs, money market funds), and use APR when comparing the stated cost of debt (mortgage rates, auto loan rates). The reason is disclosure standards — the Truth in Savings Act requires APY for deposit accounts, while the Truth in Lending Act requires APR for loans. When both figures appear for the same product, APY always represents the true annual effect including compounding.

For investment returns quoted as “annual returns,” most brokerages report total percentage return — which is effectively APY. When a fund manager says a fund returned 8% last year, they mean the effective annual yield, not a nominal rate. Use this calculator to convert back to APR if you want to compare against a nominal savings rate or loan rate on an apples-to-apples basis.

Financial Disclaimer

This calculator is for educational purposes only. Results are based on standard APR/APY conversion formulas. Actual loan and savings product costs or returns may differ due to fees, promotional rates, rate adjustments, or terms specific to the product. This tool does not constitute financial advice. Always review the full terms and disclosures of any financial product before agreeing to it.

APR vs. APY Calculator