Short answer: APR is the simple annual interest rate. APY includes the effect of compounding within the year. APY is always equal to or higher than APR for the same product, and the more frequently interest compounds, the bigger the gap.
For savings accounts, banks are required by federal law to advertise the APY (not APR). For loans and credit cards, lenders typically advertise the APR (not APY). This asymmetry exists because both numbers favor the issuer when shown — APY makes savings rates look bigger, APR makes loan rates look smaller.
The math
The formula relating APR to APY is:
APY = (1 + APR/n)^n − 1
Where n is the number of compounding periods per year. Some examples at 5% APR:
| Compounding | APR | APY |
|---|---|---|
| Annually | 5.000% | 5.000% |
| Quarterly | 5.000% | 5.094% |
| Monthly | 5.000% | 5.116% |
| Daily | 5.000% | 5.127% |
| Continuously | 5.000% | 5.127% |
The takeaway: more frequent compounding helps, but the gains diminish quickly. Going from monthly to daily compounding adds only 0.011 percentage points. Going from daily to continuous adds essentially nothing in practice.
Why APY matters when comparing savings accounts
If two banks both advertise "5%" — one as APR and one as APY — the APY account is a slightly better deal at the same nominal rate. But this almost never happens in practice because the Truth in Savings Act requires US banks to advertise savings rates as APY.
Where APY genuinely matters: comparing accounts with different compounding frequencies. A money market account that compounds quarterly at 4.50% APY is exactly equivalent to a savings account that compounds daily at 4.50% APY — the APY is the apples-to-apples comparison number, regardless of how the bank computes interest internally.
Why APR matters when comparing loans
For loans, the math goes the other way: a higher APY means you owe more, so lenders advertise the lower APR figure. The gap is meaningful on long-term debt:
- A mortgage at 7.00% APR compounded monthly has an APY of 7.229%
- A credit card at 24.99% APR compounded daily has an APY of 28.34%
The "true cost" of borrowing is closer to the APY figure than the APR. This is especially relevant for credit cards, where the daily compounding effectively raises your effective rate by several percentage points.
What about "intro APR" and "promotional APY"?
Promotional rates have time limits — usually 6 to 18 months. Read the fine print:
- For savings: confirm what the rate drops to after the promo period (the "go-to rate"), and whether the promo APY requires a minimum balance or direct deposit.
- For loans: confirm whether the post-promo rate is fixed or variable, and whether deferred interest applies (in which case all the interest from the promo period gets added back if you don't pay off the balance in time).
Practical takeaways
- When comparing savings accounts, look at APY only. All US banks advertise APY for savings.
- When comparing loans, the APR is what's advertised, but the actual cost is the APY. Use a loan calculator to see the true cost.
- Compounding frequency matters less than you might think. The difference between monthly and daily compounding is usually under 0.02 percentage points.
- Promotional rates are usually accurate as advertised but only for a limited window. Check the post-promo terms.
To project how a specific APY grows your savings over time, use our APY calculator — enter the APY and your time horizon, and see the year-by-year breakdown.