Open any banking website and you'll meet two acronyms that look almost identical and behave nothing alike: APR and APY. Both contain "annual percentage," both are quoted as percentages, both look like rates, and both are sometimes used interchangeably in plain conversation. They are not the same number. The difference comes down to one word: compounding.
The definitions, in one sentence each
APR (Annual Percentage Rate)is the simple, non-compounded interest rate for a year. It's the rate quoted before any compounding effects are applied.
APY (Annual Percentage Yield) is the effective annual rate after compounding is applied. If a bank pays you interest monthly and that interest then earns its own interest for the rest of the year, APY captures the total return.
That's the whole concept. The math underneath: APY = (1 + APR / n)n − 1, where nis the number of compounding periods per year. APY is always greater than or equal to APR; they're equal only when n = 1 (annual compounding).
A worked example
Say a high-yield savings account advertises 5% APR with monthly compounding. The APY is:
(1 + 0.05/12)12 − 1≈ 5.116%
That extra 0.116% of effective return on a $20,000 balance is about $23 a year — small, but real. At 7% APR with daily compounding (365 periods), the APY is 7.25% — a 0.25% difference, or $50 / year on $20,000. The higher the rate and the more frequent the compounding, the wider the gap.
Where the convention flips: lending vs saving
Here's the trick that catches people out: which acronym a product advertises depends on whether the bank wants the number to look small or large.
- Loans, mortgages, credit cards usually advertise APR — because it's the smaller of the two numbers, and a smaller-looking rate is a better headline for what you're paying.
- Savings accounts, CDs, money-market accounts usually advertise APY— because it's the bigger of the two, and a bigger-looking rate is a better headline for what you're earning.
Both numbers are honest; they're just framed for marketing. When comparing products, always compare like for like — APR to APR, APY to APY — or convert one to the other using the formula above.
The compounding-frequency wrinkle
APR alone doesn't tell you the compounding frequency, and the gap between APR and APY widens with frequency. Two cards both quoting 22% APR but with different compounding schedules behave differently:
- 22% APR, monthly compounding → APY ≈ 24.36%
- 22% APR, daily compounding → APY ≈ 24.62%
That extra 0.26% on a $5,000 balance carried for a year is $13. Not life-changing on its own, but a useful detail when comparing two cards that look the same on paper. Our Credit Card Payoff Calculator uses monthly compounding — the closest match to how most cards actually charge interest.
Why mortgage APRs include fees too
Mortgages introduce another wrinkle: the APR on a mortgage usually includes amortised fees as well as the interest rate. So a mortgage at 6.5% interest rate might show a 6.7% APR — the extra 0.2% is the impact of origination fees, discount points and other closing costs spread over the life of the loan. That makes APR the right number for comparing mortgage offers (it includes all costs), but the wrong number to plug into a payment calculator (which wants the raw interest rate).
Our Mortgage Calculatorasks for the nominal interest rate, not the APR, for that reason. If you're shopping offers, compare APRs; if you're estimating your monthly payment, use the rate.
The simple rule
When in doubt, take whichever number you're given and ask the question that actually matters: If I owe / save $1,000 for one year, what's the dollar amount at the end?
- $1,000 at 5% APR with monthly compounding → $1,051.16
- $1,000 at 5% APY (any compounding) → $1,050 — APY is the answer.
APY is"what you actually get / pay at the end of one year." APR is the building block. Once you internalise that, the marketing on banking websites stops being confusing.
Bottom line
APR is the labelled rate; APY is the realised rate. Lenders quote APR (looks small); savers quote APY (looks big). Always compare like-with-like, watch out for compounding frequency in fine print, and remember that mortgage APR bundles fees while savings APR is purely interest. Run any of these scenarios through our Compound Interest Calculator to see exactly what an "X% APR" turns into over a multi-year horizon.