APR vs APY: What’s the Difference? (2025 Guide With Simple Examples)
APR and APY are two interest-rate terms that look similar — but they mean very different things. Understanding them helps you compare loans, savings accounts, and investments accurately.
Here’s the simplest possible explanation:
- APR shows the yearly rate without compounding.
- APY shows the yearly rate with compounding included.
This difference can change your real cost (for loans) or your real return (for savings).
Try it yourself while reading
Use the free compound interest calculator to compare APR and APY with your own numbers.
Open calculator →What Is APR?
APR (Annual Percentage Rate) is the simple yearly interest rate. It does not include compounding.
If a savings account or loan advertises:
APR: 5%
This means you earn or pay exactly 5% per year — assuming no monthly or daily compounding is applied.
APR Example
If you invest $10,000 at 5% APR for one year:
Interest earned: $500
End balance: $10,500
No matter the compounding frequency, the APR itself ignores it.
What Is APY?
APY (Annual Percentage Yield) shows the true yearly return because it includes compounding — monthly, daily, or even continuous.
If a bank says:
APY: 5.12%
This means the account pays the equivalent of 5.12% per year after compounding.
APY Example
If your account pays 5% APR, compounded monthly, the APY becomes:
APY ≈ 5.12%
On a $10,000 deposit:
- Interest earned: $512
- End balance: $10,512
This is higher than the APR result because compounding grows your money faster.
APR vs APY Formula
APY formula:
APY = (1 + APR / n)n − 1
Where:
- APR = annual percentage rate
- n = compounding periods per year
Common compounding intervals:
- Monthly → n = 12
- Daily → n = 365
- Quarterly → n = 4
APR vs APY Side-by-Side Example
Imagine a savings account offering:
- APR: 5%
- Compounded: monthly
| APR | 5.00% |
| APY | 5.12% |
On a $10,000 deposit:
- APR result: $500 interest
- APY result: $512 interest
The difference grows dramatically over multiple years.
Why APY Is Always Higher Than APR
When interest compounds, you earn interest on interest. That snowball effect makes APY higher — unless compounding is zero, in which case APR = APY.
When to Use APR vs APY
Use APR when comparing:
- Loans (personal loans, mortgages, auto loans)
- Credit cards
- Any borrowing where compounding varies
Use APY when comparing:
- Savings accounts
- High-yield savings
- Certificates of deposit (CDs)
- Investment platforms with compounding
Summary Table
| Feature | APR | APY |
|---|---|---|
| Includes compounding? | ❌ No | ✅ Yes |
| Used for | Loans, credit cards | Savings, investments |
| Which is higher? | Lower | Higher (when compounding) |
Final Thoughts
APR tells you the sticker rate.
APY tells you the real rate.
If you want to know the true growth of your savings — or the true cost of a loan — always compare APY.
Run your own APR vs APY scenarios
Use the free calculator to see long-term differences instantly.
Try the calculator →Key takeaways
- APR is a simple yearly rate that ignores compounding.
- APY includes compounding and shows your true yearly return or cost.
- For loans and credit cards, APR is usually advertised, but APY reveals the real cost over time.
- For savings and investments, APY is the best number to compare different offers.
- Even with the same APR, more frequent compounding means a higher APY.
Next steps
👉 See how compounding actually grows your balance with the
Compound Interest Calculator.
👉 Learn the basics of compounding in the guide
What Is Compound Interest?
👉 Compare simple vs compound interest side by side in
Simple Interest vs Compound Interest.
👉 Plan how much you should save monthly using the
Savings Goal Calculator or read the guide
How Much Should You Save Each Month?
👉 Or browse all tools on the FinanceCalcCenter homepage.