APR vs. APY: What's the Difference and Which One Matters?
APR is the yearly rate without compounding; APY includes compounding. Learn when banks use each, how to convert between them, and how to compare offers.
APR (annual percentage rate) is a yearly rate that does not include the effect of compounding. APY (annual percentage yield) does. Because APY counts the “interest on interest,” it’s always equal to or higher than the APR for the same account.
The short version: use APY to compare savings accounts and CDs. Use APR to compare loans and credit cards, but remember that on a credit card balance, compounding makes the true cost higher than the APR suggests.
APR, explained
APR is the simple yearly rate. On loans, it also folds in certain fees, which is why a mortgage’s APR is usually a bit higher than its advertised interest rate. U.S. law (the Truth in Lending Act) requires lenders to disclose the APR so borrowers can compare loans on equal terms.
What APR does not show is how often interest compounds. A credit card with a 24% APR that compounds daily actually costs more than 24% per year if you carry a balance.
APY, explained
APY tells you how much you’ll actually earn in a year, including compounding. Under the Truth in Savings Act, U.S. banks and credit unions must disclose the APY on deposit accounts, which makes it the fairest number for comparing savings options.
If an account says 4.00% APY, a $10,000 balance left untouched for a year will grow to about $10,400, no matter whether the bank compounds daily or monthly. The compounding is already baked in.
How to convert APR to APY
APY = (1 + APR/n)^n − 1
Where n is the number of compounding periods per year.
| APR | Compounded annually | Compounded monthly | Compounded daily |
|---|---|---|---|
| 2.00% | 2.00% APY | 2.02% APY | 2.02% APY |
| 4.00% | 4.00% APY | 4.07% APY | 4.08% APY |
| 6.00% | 6.00% APY | 6.17% APY | 6.18% APY |
| 24.00% | 24.00% | 26.82% | 27.11% |
The gap grows as rates rise. At low rates, APR and APY are almost identical. At credit card rates, the difference is significant.
Which number to look at
| You’re comparing… | Look at | Why |
|---|---|---|
| Savings accounts, CDs, money market accounts | APY | Shows what you’ll actually earn |
| Mortgages, auto loans, personal loans | APR | Includes fees, required by law for comparison |
| Credit cards | APR, then remember it understates the cost | Daily compounding raises the effective rate |
| Treasury bills | Investment yield | Comparable to APY; see below |
A note on Treasury bill rates
Treasury bills are often quoted on a discount basis, which understates the return. The 3-month T-Bill rate is currently 4.09% on a discount basis (October 13, 2026). Its investment yield, the number you’d compare with a savings APY, is a little higher. Our T-Bills vs. savings calculator converts it for you automatically.
Common traps to watch for
- Teaser rates. A savings account may advertise a high APY for a few months, then drop to a lower rate. Read the terms.
- Balance requirements. Some accounts only pay the headline APY on balances within a certain range.
- Variable rates. Savings APYs can change any time. When the Federal Reserve cuts or raises rates, banks usually follow. The effective federal funds rate is currently 3.88%.
- Fees. A monthly fee can wipe out the interest on a small balance. APY doesn’t include account fees.
Key takeaway: When you’re earning interest, compare APY. When you’re paying interest, compare APR, and assume the real cost of revolving credit card debt is even higher.
Sources
This content is for educational purposes only and isn't financial, tax or investment advice. Rates change daily; confirm current terms with your bank, broker or TreasuryDirect before making decisions. See our full disclaimer.