APR vs APY: What's the Difference and Which Matters?
By Arshi Khan, Founder of Just4Marketing · October 26, 2026 · 5 min read
How APR and APY differ, the formula to convert between them, why savings quote APY and loans quote APR, and how loan fees change the APR.
Banks advertise savings accounts in APY and loans in APR — and that's not an accident. The two numbers describe the same rate in different ways, and the difference always makes savings look a little better and borrowing look a little cheaper. Knowing how to convert between them lets you compare offers on equal terms.
The short version
- APR (annual percentage rate) is the yearly rate without compounding. A 5% APR compounded monthly charges or pays 5% ÷ 12 ≈ 0.417% each month.
- APY (annual percentage yield) is what you actually earn or pay over a year with compounding — interest earning interest.
When interest compounds more than once a year, APY is always higher than APR. If it compounds once a year, the two are the same.
The formula
APY = (1 + APR ÷ n)n − 1, where n is the number of compounding periods per year (12 for monthly, 365 for daily).
| APR | Compounding | APY |
|---|---|---|
| 5.00% | Yearly | 5.000% |
| 5.00% | Monthly | 5.116% |
| 5.00% | Daily | 5.127% |
| 4.50% | Monthly | 4.594% |
| 24.00% | Monthly | 26.824% |
$10,000 in an account paying 5% APR compounded monthly grows to $10,511.62 in a year — the extra $11.62 over a flat 5% is the compounding that APY captures. The gap is small on savings rates but large on credit cards: a 24% APR card compounding monthly really costs nearly 26.8% a year on a balance you carry.
Why savings use APY and loans use APR
For savings, APY is the bigger, more attractive number, and in the US banks are required to show it so savers can compare accounts fairly. For loans, APR is the number regulations require — and it's the lower of the two. But a loan's APR has a twist: it also includes certain fees.
APR on a loan includes fees
On mortgages and many other loans, the APR is not just the interest rate. It folds in lender fees such as origination charges and discount points, spread over the loan's term. That's why a mortgage might show a 6.25% interest rate and a 6.48% APR. The interest rate sets your payment; the APR helps you compare the true cost of offers with different fees.
- Two loans with the same rate but different APRs: the higher APR has higher fees.
- A low rate with a high APR often means you're paying points to buy the rate down.
- APR assumes you keep the loan for its full term, so fees look smaller than they are if you sell early.
How to compare offers
- Savings and CDs: compare APY to APY. If one bank quotes APR, convert it with the formula.
- Loans and mortgages: compare APR to APR for the overall cost, and the interest rate for the monthly payment.
- Crypto staking and DeFi: check which one is quoted. A high APY often assumes you restake rewards every day.