APR and APY are both interest rate concepts, but they answer different questions. Confusing them can lead to incorrect comparisons between loans, credit cards, and savings products.
APR: the nominal rate
APR (Annual Percentage Rate) represents the nominal yearly cost of borrowing (or nominal interest rate) without compounding effects baked in. In lending, it may also reflect certain fees depending on rules and disclosures.
APY: the effective yield
APY (Annual Percentage Yield) reflects compounding. If interest compounds monthly or daily, APY will be higher than APR for the same nominal rate because interest earns interest within the year.
Why this matters in practice
- For savings: APY tells you what you actually earn.
- For debt: APR helps compare borrowing costs, but compounding and fees can change real cost.
- Frequency matters: daily vs monthly compounding changes APY slightly.
Model the real outcome
To see the impact of compounding, plug the APR into the Compound Interest Calculator and compare different compounding frequencies. For very frequent compounding scenarios, use the Daily Compound Calculator.
Takeaway
Use APY to compare savings yields and APR to compare borrowing costs, but always look at the full cost structure and compounding assumptions.
FAQ
Next step
Use the calculators to model your scenario with consistent assumptionsthen compare outcomes across time horizons and contribution plans.