Blog
APR vs APY: How to Compare Interest Rates That Look the Same
Two accounts can both advertise 6% and pay different amounts. The difference is whether the rate accounts for compounding, and which one a provider quotes depends on which looks better.
APY includes the effect of compounding within the year. APR usually does not — it is a nominal annual rate, and on borrowing it is also meant to fold in certain fees. If you compare an APR on one product to an APY on another, you are not comparing like with like.
What each one measures
APR, annual percentage rate, is the rate quoted per year before compounding within that year is taken into account. On loans and credit, regulations in many countries additionally require APR to include certain mandatory fees, which is what makes it more useful than the bare interest rate for comparing borrowing.
APY, annual percentage yield, sometimes called the effective annual rate, is what you actually end up with after interest has been credited and started earning interest itself. It is the number that lets you compare two savings accounts directly regardless of how often each one pays.
The conversion
A 6% APR compounded monthly: (1 + 0.06/12)^12 - 1 = 0.0617, so 6.17% APY.
A 6% APR compounded daily: (1 + 0.06/365)^365 - 1 = 0.0618, so 6.18% APY.
When compounding is annual, n is 1 and the two are identical. That is the only case where APR and APY agree.
APY = (1 + APR/n)^n - 1 APR = n x ((1 + APY)^(1/n) - 1) n = number of compounding periods per year
How much the gap actually is
The gap widens as the rate rises. At 2% it is negligible. At 24% — a common credit card range — the difference between the quoted rate and what compounding actually costs is nearly three percentage points a year. This is why the distinction matters far more on expensive debt than on modest savings.
| Nominal APR | Compounded monthly (APY) | Compounded daily (APY) |
|---|---|---|
| 2% | 2.02% | 2.02% |
| 6% | 6.17% | 6.18% |
| 12% | 12.68% | 12.75% |
| 20% | 21.94% | 22.13% |
| 24% | 26.82% | 27.11% |
Worked example on savings
Two accounts, 10,000 deposited, left for one year.
Account A advertises 5.00% APY. After a year: 10,000 x 1.05 = 10,500.
Account B advertises 4.95% APR compounded daily. Its APY is (1 + 0.0495/365)^365 - 1 = 5.075%. After a year: 10,507.50.
Account B has the lower headline number and pays more. Comparing the two advertised figures directly would have led to the wrong choice — a small difference here, but the same mechanism operates on larger balances and longer terms.
Worked example on borrowing
A card quotes 19.99% APR, interest compounded monthly. Carry a 3,000 balance for a year with no payments.
The effective rate is (1 + 0.1999/12)^12 - 1 = 21.9%. The interest cost is roughly 657, not the 600 that the headline 19.99% suggests.
In practice most cards calculate on an average daily balance, which changes the exact figure, but the direction is the same: the cost of carrying a balance exceeds the advertised APR.
Which number providers choose to show
None of that is necessarily deceptive; both figures are legitimate descriptions of the same account. But the incentive to quote whichever is more flattering is real, and the defence is simply to convert everything to one basis before comparing.
- Savings products tend to advertise APY, because compounding makes the number look larger.
- Loans and credit tend to advertise APR, because excluding compounding makes the number look smaller.
- In several jurisdictions the choice is regulated rather than optional, with specific disclosure rules for each product type.
- Introductory and promotional rates complicate both. A 12-month promotional APY is not the rate you earn in year two.
- Comparison sites sometimes mix the two across product categories, so it is worth checking which each listing uses.
Pitfalls when comparing APR and APY quotes
- Comparing an advertised APY on one product with an advertised APR on another without converting.
- Assuming APR on a loan includes every cost. It includes certain mandatory fees under most rules, but optional insurance, late fees and some arrangement charges may sit outside it.
- Dividing APY by 12 to get a monthly rate. Use the APR for that, or take the twelfth root of (1 + APY).
- Ignoring that a variable rate can change the month after you open the account, making both figures a snapshot rather than a promise.
- Overweighting compounding frequency. Moving from monthly to daily compounding is worth far less than a quarter-point better headline rate.
Assumptions and limitations
Both figures assume the rate holds for a full year and that nothing is added or withdrawn. Most savings rates are variable, and an account paying an attractive rate today can reprice with notice. A quoted APY is therefore a description of current terms, not a forecast of your actual return.
Both also ignore tax. If interest is taxable where you are, the after-tax return is what compounds, and a headline comparison between two accounts is unaffected but the absolute figure is lower than quoted.
On borrowing, APR assumes you follow the stated repayment schedule. Paying early, paying late, or drawing further credit all change the effective cost, sometimes substantially. And on products with tiered rates — where a balance above a threshold earns a different rate — a single APY figure describes a scenario that may not match the balance you actually hold.
Compare rates on the same basis
APR and APY are not interchangeable labels. Before comparing two offers, check whether each rate is quoted as an annual percentage rate, annual percentage yield, nominal rate, or another jurisdiction-specific measure. Fees and compounding can also affect the actual cost or return. If the provider supplies a payment schedule or effective annual rate, use the documented figure rather than inferring more precision than the quote supports.
Frequently asked questions
Is APY always higher than APR?
For the same nominal rate, yes, unless compounding is annual, in which case they are equal. APY can never be lower.
Which should I use to compare two savings accounts?
APY, or convert both to APY first. It is the only figure that accounts for differences in how often each account credits interest.
Does APR include fees on a mortgage?
In many jurisdictions it must include specified mandatory costs, which is why a mortgage APR is usually slightly above its interest rate. What counts as mandatory varies by country, so check the disclosure rather than assuming.
What is the effective annual rate?
Another name for APY. The terms are used interchangeably, with APY more common on deposit products and effective annual rate more common in finance and lending documents.
Can APR ever be higher than APY?
Yes, depending on how the rate and compounding are defined. The important point is to compare like-for-like measures and read the provider's stated definitions.
Why can a loan's APR be different from its interest rate?
APR can incorporate certain fees or costs associated with borrowing, depending on the jurisdiction and product. The exact definition is set by applicable rules.
Conclusion
The rule is short: convert everything to the same basis before comparing. Use APY for savings, use APR alongside the fee schedule for borrowing, and run the conversion formula whenever a provider gives you only one of them. The gap is trivial at low rates and material at high ones, so the calculation is most worth doing precisely where the money at stake is largest — on credit card balances and other expensive debt.
Sources and references
These references are provided for factual background. Rules, rates and policies can change, so check the current source before making a real financial or legal decision.
Figures in this article are illustrative. Results depend on your own rates, fees, taxes and circumstances, and are for educational and planning purposes rather than financial advice.