APR vs APY: What Banks Don't Tell You
Published Apr 14, 2026 Β· 6 min read
Banks love to advertise high APY on savings accounts and low APR on loans. These two acronyms sound similar but measure fundamentally different things β and the difference can cost or earn you hundreds of dollars a year.
APR: Annual Percentage Rate
APR is the simple annual interest rate without compounding. If a credit card charges 24% APR, that means roughly 2% per month (24 Γ· 12). APR is the standard disclosure for loans and credit cards under the Truth in Lending Act.
- Used for: mortgages, auto loans, credit cards, personal loans
- Includes: base interest rate + certain fees (origination, closing costs)
- Does NOT factor in: how often interest compounds
APY: Annual Percentage Yield
APY accounts for compound interest β interest earned on interest. A savings account advertising 5.00% APY with daily compounding actually uses a slightly lower nominal rate (~4.88%), but the compounding pushes total earnings to 5.00% over a year.
| Compounding | Nominal Rate | Effective APY |
|---|---|---|
| Annual | 5.00% | 5.00% |
| Monthly | 5.00% | 5.12% |
| Daily | 5.00% | 5.13% |
The Formula
APY = (1 + r/n)^n β 1, where r is the nominal rate and n is the number of compounding periods per year. On $10,000:
- 5% APR compounded annually = $500 interest
- 5% APR compounded daily = $513 interest (5.13% APY)
The Bank Marketing Trick
Banks advertise APY on savings because compounding makes the number look bigger. They advertise APR on loans because it looks lower than the effective rate you actually pay. Always compare APY to APY for savings, and look at the effective rate on loans.
Quick Rules
- Saving money? Compare APY β higher is better
- Borrowing money? Compare APR β lower is better, but check the effective APY
- More compounding periods = higher APY for the same nominal rate
- High-yield savings accounts with daily compounding give the best results