APR vs APY: What's the Difference? (With Examples)

APR and APY look almost identical on paper, but they measure fundamentally different things — and mixing them up can cost you real money. The difference between APR and APY comes down to one word: compounding. Understanding exactly how each works tells you which number to look at when evaluating a savings account, comparing mortgage offers, or sizing up a credit card.

What is APR?

APR stands for Annual Percentage Rate. It is the yearly interest rate on a loan or credit product expressed as a simple percentage — without accounting for how often interest compounds within the year. Federal law requires lenders to disclose APR under the Truth in Lending Act, which is why you see it quoted on mortgages, auto loans, personal loans, and credit cards.

For most loans, APR also folds in certain fees (such as origination fees) spread across the loan's life, making it a broader measure of cost than a stated interest rate alone. But critically, APR does not factor in intra-year compounding. It treats interest as if it accrues only once per year.

The APR formula:

APR = (Total Interest + Fees) ÷ Principal ÷ Loan Term in Years × 100

Example: You borrow $10,000 for one year. The lender charges $500 in interest and a $100 origination fee. APR = ($500 + $100) ÷ $10,000 ÷ 1 = 6% APR.

What is APY?

APY stands for Annual Percentage Yield. It is the real return on savings or investments after accounting for compounding throughout the year. The Truth in Savings Act requires banks to disclose APY on savings products, which is why you see it on high-yield savings accounts, CDs, and money market accounts.

Because APY includes compounding, it is almost always slightly higher than the stated interest rate. The more frequently interest compounds, the larger the gap between the nominal rate and the APY.

The APY formula:

APY = (1 + r/n)ⁿ − 1

Where r is the annual interest rate as a decimal and n is the number of compounding periods per year.

Example: A savings account pays 5% interest compounded monthly (n = 12):

• APY = (1 + 0.05/12)¹² − 1
• APY = (1.004167)¹² − 1
• APY ≈ 5.116%

The extra 0.116% may look trivial, but on a $50,000 balance over 10 years it translates to several hundred dollars of additional earnings. Use the compound interest calculator to see exactly how APY-driven compounding builds your balance over any time horizon.

APR vs APY: the key difference explained

The core difference is that APY accounts for compounding and APR does not. When interest compounds, you earn interest on previously accumulated interest — and over time this causes balances to grow faster than a simple annual rate predicts.

Feature	APR	APY
Includes compounding?	No	Yes
Used for	Loans, mortgages, credit cards	Savings accounts, CDs, investments
Relative size	Lower (no compounding effect)	Higher (compounding inflates it)
Governing law	Truth in Lending Act	Truth in Savings Act
A better number means…	Lower APR = you pay less	Higher APY = you earn more

Real-world examples

APR example: a 30-year mortgage

You take out a $300,000 mortgage at a 6.5% APR over 30 years. The APR reflects the stated interest rate plus any financing charges folded into the annual cost figure. Your monthly payment works out to approximately $1,896, and you pay roughly $382,000 in total interest over the life of the loan. The mortgage calculator lets you compare how different APR rates — 6%, 6.5%, or 7% — change your monthly payment and total interest cost side by side.

APY example: a high-yield savings account

A bank advertises a savings account with a 5.00% APY compounded daily. The underlying daily rate is 5% ÷ 365 ≈ 0.01370%, and your balance compounds every single day. On $20,000, after 12 months you earn roughly $1,023 in interest — slightly more than the flat 5% rate would suggest ($1,000) because of daily compounding.

Now imagine the bank next door advertises a "5% interest rate" without specifying APY. If that account compounds only quarterly (n = 4), the APY works out to just 5.095% — less than the daily-compounding account at the same stated rate. The same 5% nominal rate produces different APYs depending on compounding frequency. Always compare APYs, not stated rates, when evaluating savings accounts.

How to convert APR to APY (and back)

If you need to compare a loan's APR with an investment's APY — or just want the true annualized yield of any compounding instrument — the conversion formulas are straightforward:

APR → APY: APY = (1 + APR/n)ⁿ − 1

APY → APR: APR = n × ((1 + APY)^1/n − 1)

Where n = compounding periods per year (365 for daily, 12 for monthly, 4 for quarterly, 2 for semi-annual, 1 for annual).

Convert a 6% APR compounded monthly to APY:

• APY = (1 + 0.06/12)¹² − 1 = (1.005)¹² − 1 ≈ 6.168%

The 0.168% gap may seem minor, but on a $100,000 balance it represents $168 per year — every year. Over a 30-year mortgage, a similar gap compounds into thousands of dollars of additional cost. For a detailed look at how interest and principal split on each payment of a long-term loan, see how a mortgage amortization schedule works.

Which metric to use when comparing financial products

• Savings accounts, CDs, money market accounts: Always compare APY. It is the only honest apples-to-apples comparison when banks compound at different frequencies.
• Mortgages, auto loans, personal loans: Always compare APR. APR includes fees and standardizes cost across lenders, giving a more complete picture than the interest rate alone.
• Comparing a loan against an investment: Convert the loan's APR to APY using the formula above, then compare them on a level footing.

Why banks advertise APY for savings but APR for loans

This is not an accident. Banks show APY on savings products because — as the larger number — it makes yields look more attractive to depositors. They show APR on loans because — as the smaller number — it makes borrowing costs appear cheaper. Both disclosures are legally required, but marketing naturally leads with whichever figure is most favorable for the product being sold.

Now that you know the difference, you can decode both numbers correctly. A "5% APY" savings account and a "5% APR" auto loan are not offering the same rate. The savings account's actual effective rate is higher than 5% because of compounding; the auto loan's effective annual cost depends on how fees are included and how principal amortizes over the term.

The bottom line: APR is what you pay on debt; APY is what you earn on savings. APR ignores compounding; APY includes it. When evaluating any financial product, match the metric to the product type — compare APYs to APYs and APRs to APRs — and you will make much better decisions every time.