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APR vs APY -- Nominal Rate vs Yield
Published May 1, 2026
APR vs APY — Nominal Rate vs Yield
APR (Annual Percentage Rate) and APY (Annual Percentage Yield) both describe interest as a yearly percentage, but they measure different things. Confusing them leads to misjudging the true cost of a loan or the true return on a savings account.
The core difference
| APR | APY | |
|---|---|---|
| Also called | Nominal rate | Effective annual rate (EAR) |
| Includes compounding? | No | Yes |
| Best used for | Comparing loan costs | Comparing savings yields |
| Relative value | Usually lower | Usually higher |
APR is the simple annual rate stated on a loan or credit product — it does not account for the fact that interest compounds more than once a year. APY factors in compounding, so it shows what you actually earn or owe after a full year of periodic accrual.
Conversion formula
Convert APR to APY when you know the compounding frequency (n times per year):
APY = (1 + APR / n)^n − 1
Example: A savings account with 5% APR compounded monthly:
- APY = (1 + 0.05 / 12)¹² − 1 = 5.116%
That extra 0.116% is the compounding effect — each month's interest earns a little more in the next month. Daily compounding at the same APR would give 5.127%.
When APR understates the true cost
For credit cards, lenders quote APR. A card at 20% APR compounded daily has an effective APY of 22.13% — the real annual cost of carrying a balance. If you pay in full each month, APR is the relevant figure. If you carry a balance, APY is what matters.
Shopping savings products
When comparing savings accounts, CDs, or money market accounts:
- Sort by APY — it already accounts for compounding frequency
- Confirm the compounding schedule: a 5.0% APY compounded daily delivers fractionally more than 5.0% compounded annually at the same advertised rate
Common traps
- Loan advertisements often lead with APR because it looks lower. Check whether origination fees are included — regulatory definitions vary by jurisdiction.
- Crypto yields frequently quote APR when the auto-compound feature would give a meaningfully higher APY. Always ask which figure is being shown.
- Teaser savings rates are sometimes given as APY to look attractive, then drop after the introductory period ends.
- Mortgages in the US include fees in the APR figure, which is why the advertised APR is slightly higher than the stated interest rate — the fee-included number is often called APRC in UK/EU contexts.
Use the Interest Calculator to compare simple vs compound scenarios at the same rate and see exactly how compounding frequency shifts the ending balance over time.