Boneyard Tools

APR vs APY: what the numbers really mean

Why the same rate can be quoted two ways, how compounding frequency drives the gap, and how to compare savings and loan offers fairly.

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Two labels for related rates

APR, the annual percentage rate, is a nominal figure that states the yearly rate without accounting for compounding inside the year. APY, the annual percentage yield, is the effective rate you actually earn or pay once that in-year compounding is included. They describe the same underlying interest, but APY tells the fuller story because it captures interest earning interest across the periods.

How frequency drives the gap

The distance between APR and APY depends entirely on how many times a year interest is added. Compounding once a year leaves them identical. Move to semiannual, quarterly, monthly and daily, and each step lifts the APY a little higher for the same APR. A 12 percent nominal rate becomes 12.36 percent compounded semiannually, 12.5509 percent quarterly, 12.6825 percent monthly and 12.7475 percent daily, showing how the curve flattens as frequency climbs toward continuous compounding.

Comparing offers the right way

Because APY already bakes in compounding, it is the fair way to compare savings accounts or deposits from different providers, even when they compound on different schedules. For borrowing, the same logic applies in reverse: a loan quoted with a low APR can cost more than it appears if it compounds frequently, so converting everything to a single basis before comparing prevents costly mistakes. Always line up rates on the same measure, ideally APY, before deciding.

Reading a bank disclosure

Savings products in many markets are legally required to advertise APY so consumers can compare like with like, while loans often lead with APR. When a disclosure shows one but not the other, this calculator lets you convert between them at the stated compounding frequency. That turns a headline number into an apples-to-apples figure you can trust when weighing one account or loan against another.

Frequently asked questions

Should I compare savings accounts by APR or APY?

Use APY. It already includes the effect of compounding, so it reflects what you will actually earn over a year. Comparing by APR can mislead you when two accounts compound on different schedules, because the same APR can produce different real yields.

Does a higher compounding frequency always help me?

As a saver, yes, more frequent compounding always raises your APY for a given APR, though the extra benefit shrinks as you move from monthly to daily. As a borrower, more frequent compounding works against you, since it raises the effective cost of the same nominal rate.