What is the main difference between APR and APY?

APR is an annualized rate that does not itself express the effect of within-year compounding, while APY reflects compounding over the year. That is why APY can be higher than the stated APR when interest compounds more than once annually.

Can APR and APY be the same?

Yes. They are equal when interest compounds only once per year. With more frequent compounding, APY is normally higher than the corresponding nominal APR, assuming the same rate basis and no additional fees.

How do I convert APR to APY?

Use APY = (1 + APR ÷ n)^n − 1, where APR is expressed as a decimal and n is the number of compounding periods per year.

Is APY better for comparing savings accounts?

APY is useful for comparing deposit yields because it incorporates compounding, provided the accounts are compared using consistent assumptions. Rates can change, and account fees or balance requirements may also affect the outcome.

Does APR include every borrowing cost?

Not necessarily in every context. Regulatory definitions of APR and which fees must be included vary by product and jurisdiction. For a specific loan, use the lender's disclosures and applicable local rules rather than relying only on a generic formula.

APR vs APY: What’s the Difference?

APR and APY both express annual rates, but they do not describe compounding in the same way. Understanding the difference helps when comparing loans, savings accounts, investments, and other products where interest is charged or earned more than once a year.

Last reviewed: 2026-09-16

APR vs APY at a glance

APR stands for annual percentage rate. In a basic mathematical comparison, a nominal APR annualizes a periodic interest rate without adding the effect of compounding within the year. APY stands for annual percentage yield and expresses the effective annual return after compounding.

For borrowing products, legal APR disclosures can include certain fees depending on the jurisdiction and product. This guide focuses on the mathematical relationship between a nominal annual rate and an effective annual yield.

How to convert APR to APY

If interest compounds a fixed number of times per year, use this formula:

APY = (1 + APR ÷ n)^n − 1
n = number of compounding periods per year

Enter APR as a decimal. For example, 6% becomes 0.06.

APR to APY example: 6% compounded monthly

Suppose an account has a nominal annual rate of 6% and compounds monthly. There are 12 compounding periods per year.

APY = (1 + 0.06 ÷ 12)^12 − 1
APY = 0.061678… = 6.1678%
Rounded APY ≈ 6.17%

The nominal annual rate is 6%, but the effective annual yield is about 6.17% because each month's interest can itself earn interest during later months.

Why compounding frequency changes APY

Holding the nominal APR constant, more frequent compounding generally produces a higher APY. With a 6% nominal annual rate, annual compounding produces a 6% APY, while monthly compounding produces about 6.17%. The difference becomes more noticeable as the rate rises or compounding becomes more frequent.

Use CalcMetrio's Compound Interest Calculator to model how principal, rate, time, and compounding frequency affect a balance.

How to convert APY back to APR

If you know the APY and compounding frequency, rearrange the relationship:

APR = n × ((1 + APY)^(1/n) − 1)

For example, converting a 6.1678% APY back to a nominal rate with monthly compounding gives approximately 6% APR. Keep enough decimal places during intermediate steps to avoid rounding errors.

APR, APY, and loans

For loans, the interest rate is only one part of the payment calculation. Principal, term, payment frequency, and the lender's rate convention also matter. Use the Loan Payment Calculator for payment estimates and see How to Calculate a Loan Payment for the amortization formula.

Do not substitute a simple APR-to-APY conversion for a lender's official APR disclosure. Fees, timing conventions, promotional periods, variable rates, and local disclosure rules can change the real cost of borrowing.

APR, APY, and savings

APY is especially useful for understanding what a deposit could earn over one year when interest is compounded and left in the account. If two accounts have the same nominal rate but different compounding frequencies, their effective annual yields can differ.

Actual earnings may still differ from a simple APY illustration if the rate changes, you add or withdraw money, fees apply, or the account uses balance tiers. For longer-term growth examples, see How to Calculate Compound Interest.

Common APR vs APY mistakes

Comparing APR directly with APY. Convert rates to the same basis before comparing them.
Ignoring compounding frequency. Monthly and annual compounding can produce different effective yields from the same nominal rate.
Using 6 instead of 0.06 in the formula. Percentage rates must be converted to decimals for the calculation.
Rounding too early. Keep extra decimal places until the final result.
Assuming a generic formula captures every fee or rule. Product disclosures and regulations can define APR differently from a simplified nominal-rate example.

Practical takeaway

APR and APY are both annual rate measures, but APY explicitly captures the effect of compounding. When comparing financial products, first confirm whether each quoted number is an APR, APY, nominal rate, or effective rate. Then compare rates on the same basis and account for fees, changing rates, and product-specific terms.