What's the Difference Between APY and APR?

How APY accounts for compounding

APY is calculated using the formula APY = (1 + r/n)^n − 1, where r is the nominal annual interest rate and n is the number of compounding periods per year. A 5% nominal rate compounded daily produces an APY slightly above 5%, since interest earned early in the year itself begins earning interest. The more frequently interest compounds within the year, the closer the APY gets to the theoretical maximum for that nominal rate — the difference between daily and monthly compounding on the same nominal rate is usually small but not zero.

A worked example of the calculation

A savings account with a 5% nominal annual rate compounded daily produces an APY of approximately 5.13%, since 365 small daily compounding periods each add a fraction of a percent that itself begins compounding. The same 5% nominal rate compounded monthly instead produces an APY of approximately 5.12% — slightly lower than daily compounding, since interest is credited and starts compounding less frequently over the year.

How APR is calculated on credit products

APR expresses the annualized cost of borrowing, including most lender fees, but is not compounded the same way APY is — it's a standardized rate used for cost comparison rather than a precise measure of total interest paid, which also depends on the loan's amortization schedule and term. On a credit card, the disclosed APR is converted into a daily periodic rate that is applied to the balance and does compound daily in practice, even though the APR figure itself is presented as a simple annualized number.

Why the two aren't directly comparable

Because APY measures earnings with compounding built in and APR measures borrowing cost without the same compounding treatment in its headline figure, a 5% APY on a savings account and a 5% APR on a loan represent different actual costs — the two terms are used for different product categories by regulatory design, under Regulation DD for deposits and Regulation Z for credit. A saver and a borrower looking at matching 5% figures on different products are not comparing an equivalent rate.

APY on certificates of deposit vs. savings accounts

A certificate of deposit (CD) discloses an APY the same way a savings account does, but a CD's rate is fixed for its stated term, while a standard savings account's APY is typically variable and can change at the bank's discretion, subject to disclosure requirements. This means a CD's advertised APY reflects the actual yield over its full term, while a savings account's current APY is only a snapshot that may not hold for the entire year.

How APY is disclosed to consumers

Under the Truth in Savings Act, implemented through Regulation DD, banks and credit unions are required to disclose the APY on deposit accounts in a standardized way, including in advertisements and account opening disclosures, so that consumers can compare offers across institutions on a like-for-like basis. This is the same underlying regulatory goal as APR disclosure on credit products under Regulation Z — standardizing a rate figure so it can be compared — applied to the deposit side of banking rather than the lending side.

APY and inflation

APY measures the nominal growth of a deposit balance and does not by itself account for inflation. A deposit account's real (inflation-adjusted) return depends on how its APY compares to the inflation rate over the same period — a positive nominal APY does not guarantee a positive real return if inflation runs higher than the account's yield during that time.

APY on money market accounts

Money market accounts also disclose their rate as APY, following the same Regulation DD requirements that apply to savings accounts, since they are a type of deposit account rather than a money market mutual fund, which is a separate investment product regulated differently by the SEC. This distinction — a bank money market deposit account versus a brokerage money market mutual fund — is a common point of confusion given the similar product names, despite the two carrying different regulatory treatment and insurance coverage.

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