APR and APY both express a yearly rate, but they treat compounding differently. APR is the stated yearly rate. APY is the yearly rate you actually get after interest earns interest. This guide shows the formulas and a worked example. You can test your own numbers in the APR calculator or the CD calculator.
Updated November 2026
The difference in one line
APY includes compounding. APR, for savings, is the rate before compounding. On loans, the Consumer Financial Protection Bureau explains that APR is a wider measure of borrowing cost than the interest rate because it adds fees and other charges to the rate.
The formulas
Here n is the number of compounding periods per year, for example 12 for monthly or 365 for daily.
Worked example: 5% APR
| Compounding | APY | Interest on $10,000 in one year |
|---|---|---|
| Yearly (n = 1) | 5.0000% | $500.00 |
| Monthly (n = 12) | 5.1162% | $511.62 |
| Daily (n = 365) | 5.1267% | $512.67 |
In Excel the monthly APY is =(1+0.05/12)^12-1, which returns 0.051162. To go back, =12*((1+0.0512)^(1/12)-1) returns 0.0500, so an APY of 5.12 percent equals an APR of about 5 percent compounded monthly. Excel also has the EFFECT function, which does the same job.
Which one should you compare?
- Comparing savings accounts or CDs: compare APY, because it includes compounding.
- Comparing loans or credit: compare APR, because it includes fees.
- Always check how often the interest compounds and when it is credited.
Why the gap is small
At low rates the gap between APR and APY is tiny. It grows with the rate and with the number of times a year interest compounds. At 5 percent, moving from yearly to daily compounding adds about 0.13 percentage points.
These are illustrations to help you plan, not financial, legal or tax advice.
Frequently asked questions
Is APY higher than APR?
For the same account, APY is higher than APR whenever interest compounds more than once a year.
Which is better, APY or APR?
Neither is better. APY suits savings because it includes compounding, and APR suits loans because it includes fees.
How do I convert APR to APY?
APY = (1 + APR/n)^n – 1, where n is the compounding periods per year.
Does a higher APY always mean more interest?
Yes for the same balance and time, but check fees, minimums and whether the rate is promotional.