What is the difference between APR and APY?
APR vs APY is the comparison of two US federally defined yearly rate measures. APR (Annual Percentage Rate) is the standard disclosure for loans and rolls in mandatory lender fees but ignores intra-year compounding. APY (Annual Percentage Yield) is the standard disclosure for deposit accounts and includes compounding. APY is always at least as large as the same nominal APR.
Detailed definition
APR and APY exist because the same underlying interest rate can be quoted in very different ways. In 1968 Congress passed the Truth in Lending Act to standardise loan disclosures; the implementing rule (Regulation Z, 12 CFR 1026) defines APR as the yearly cost of credit including most mandatory lender fees. In 1991 Congress passed the Truth in Savings Act to standardise deposit disclosures; the implementing rule (Regulation DD, 12 CFR 1030) defines APY as the effective yearly yield including compounding. The two metrics solve different problems and live under different rules, but they share a common purpose: to make offers comparable.
APR was designed for closed-end loans where the borrower receives a lump sum and repays on a schedule. Mortgages, auto loans, and personal loans all use APR. APR includes interest plus the finance charge (origination, discount points, mortgage insurance, prepaid interest). It does not include intra-year compounding because, on a typical amortising loan, the periodic rate is already used to compute each payment. APY was designed for open-end deposit accounts where the depositor leaves money to earn interest. Savings accounts, money market accounts, CDs, and interest checking all use APY. APY assumes the rate stays constant and interest is reinvested at the same rate, so it captures the compounding effect that APR ignores.
The result: APR is the right number to compare two mortgage offers but the wrong number to compare two savings accounts. APY is the right number to compare two CDs but the wrong number to compare two auto loans. Mixing them up undersells how much a high-yield savings account actually pays and overstates how much a credit card actually costs (relative to the legal disclosure number).
Formula
APY = (1 + APR / n)^n - 1 (discrete compounding) APY = e^APR - 1 (continuous compounding upper bound) APR = n x ((1 + APY)^(1/n) - 1) (reverse: APR from APY for given n)
- APR = nominal annual rate (the rate the lender or bank quotes before compounding).
- n = number of compounding periods per year. Daily = 365 (sometimes 360 on commercial loans); monthly = 12; quarterly = 4.
- APY = effective annual rate after compounding. Always >= APR for the same nominal rate.
- e = 2.71828... The continuous-compounding APY = e^APR - 1 is the ceiling no bank can exceed at a given nominal rate.
Side-by-side comparison
| Attribute | APR (Annual Percentage Rate) | APY (Annual Percentage Yield) |
|---|---|---|
| What it measures | Yearly cost of credit (loan) | Yearly yield on deposit (savings) |
| Includes lender fees | Yes (origination, points, MI) | Not applicable |
| Includes compounding | No | Yes |
| US legal source | Regulation Z (12 CFR 1026) | Regulation DD (12 CFR 1030) |
| Typical use cases | Mortgages, auto loans, credit cards | HYSA, CDs, money market, interest checking |
| Always >= the other? | Lower at the same nominal rate | Higher at the same nominal rate |
| Locked vs variable | Locked on fixed loans; variable on ARMs and credit cards | Locked on CDs; variable on HYSA, MMA, checking |
Worked example 1: same nominal rate, two metrics
Take a 6 percent nominal annual rate compounded monthly. Two scenarios, same underlying rate:
- Loan side (APR): a personal loan quoted at "6.00 percent APR" with $0 fees. The note rate is 6 percent, APR is 6 percent.
- Deposit side (APY): a savings account quoted at "6.00 percent nominal, compounded monthly". APY = (1 + 0.06/12)^12 - 1 = 6.17 percent.
- Same nominal rate produces different headline numbers: 6 percent vs 6.17 percent. The 17 basis point gap is pure compounding.
Worked example 2: 2026 HYSA at different compounding schedules
A 5.00 percent nominal rate on a $25,000 deposit, four compounding schedules:
| Compounding | APY | Interest earned in year 1 on $25,000 |
|---|---|---|
| Annual (n = 1) | 5.000 percent | $1,250.00 |
| Monthly (n = 12) | 5.116 percent | $1,279.00 |
| Daily (n = 365) | 5.127 percent | $1,281.73 |
| Continuous | 5.127 percent | $1,281.78 |
The jump from annual to monthly compounding adds $29; monthly to daily adds another $2.73; daily to continuous adds 5 cents. Past daily compounding the gains round to zero at deposit rates.
Common pitfalls
- Comparing a loan APR to a savings APY. They mean opposite things on different products. Always compare APR to APR and APY to APY.
- Credit card "APR" hides the real cost. Cards quote APR but compound daily on carried balances. A 22 percent APR carried indefinitely produces an effective yield to the bank of 24.6 percent (APY).
- "6 percent guaranteed" without specifying which rate. Some ads quote the nominal rate, others the APY. Two products both saying "6 percent" can differ by 20 basis points.
- Mortgage APR is misleading if you sell early. APR amortises points over the full term; if you sell or refinance in year 5 you do not recover them, so the higher-rate, no-points loan can be cheaper.
- Ignoring 360 vs 365 day conventions. Some commercial loans and money market accounts use a 360-day year. At 5 percent that changes the APY by about 0.07 percentage points.
- Promotional APY vs ongoing APY. A 7 percent APY for the first 90 days that drops to 0.5 percent is not the same as a sustained 4 percent APY for the year.
Related terms
Related calculators on 3Tej
Convert between APR and APY, or compare two offers head-to-head, with these free calculators:
Frequently asked questions
What is the difference between APR and APY?
APR is the nominal yearly rate on a US loan plus mandatory finance charges (origination, discount points, mortgage insurance); it ignores intra-year compounding. APY is the effective yearly rate on a US deposit account; it includes compounding. APY is always at least as large as the same nominal APR. US lenders disclose APR under Regulation Z; US banks disclose APY under Regulation DD.
How do I convert APR to APY?
Use APY = (1 + APR / n)^n - 1, where n is the number of compounding periods per year. At a 6 percent APR compounded monthly: APY = (1 + 0.06/12)^12 - 1 = 6.17 percent. At a 6 percent APR compounded daily: APY = (1 + 0.06/365)^365 - 1 = 6.18 percent.
Should I compare loans using APR or APY?
Use APR. US lenders are required to disclose APR under Regulation Z, so APR is the standard for loan comparisons and it bakes in most mandatory closing costs. Just remember APR ignores intra-year compounding, so compare two APRs that use the same compounding schedule.
Should I compare savings accounts using APR or APY?
Use APY. US banks must disclose APY under Regulation DD for deposit accounts. APY normalises different compounding schedules into one yearly number so a savings account that compounds daily can be compared apples to apples with a CD that compounds monthly.
Why is APR lower than APY at the same nominal rate?
Because APR ignores intra-year compounding. If a 6 percent rate is compounded monthly, each month's 0.5 percent interest itself earns interest for the rest of the year, lifting the effective rate to 6.17 percent APY. APR simply quotes the underlying 6 percent.
Is credit card APR the same as APY?
No, but they can be close. Credit cards apply a daily periodic rate (APR / 365) to revolving balances; if interest is added daily and carried, the effective annual yield is APY = (1 + APR/365)^365 - 1. At a 22 percent APR the effective yield on a carried balance is about 24.6 percent. Cards typically advertise APR even though the borrower actually pays APY.
Sources and further reading
- Consumer Financial Protection Bureau, Regulation Z - Truth in Lending (12 CFR Part 1026).
- Consumer Financial Protection Bureau, Regulation DD - Truth in Savings (12 CFR Part 1030).
- CFPB, What is the difference between an interest rate and the APY on a deposit account?.
- CFPB, What is the difference between a mortgage interest rate and an APR?.
- FDIC, National Rates and Rate Caps - monthly US deposit benchmark.