APR vs APY
What's the difference between APR and APY? Clear definitions, the relationship between the two, and which one to use when.
Reviewed Jan 15, 2025
Quick answer
APR is the simple annual rate without compounding. APY is the effective annual rate with compounding factored in. APY is always equal to or higher than the APR for the same nominal rate.
APR — Annual Percentage Rate
APR is the headline rate quoted on loans and credit cards. It does not assume any compounding within the year, so for a credit card that compounds daily, the true cost is higher than the APR suggests.
APY — Annual Percentage Yield
APY is what you actually earn (or pay) over a year once compounding is included. Banks quote APY on savings products because compounding makes it look bigger.
The relationship
APY = (1 + APR/n)^n − 1, where n is the number of compounding periods per year. Daily compounding produces a slightly higher APY than monthly, and so on.