Guide
APR vs APY: What’s the Difference?
APR and APY sound alike but they measure different things. Here’s the short version, a simple example, and how compounding frequency shifts APY.
Published: March 12, 2025 · Updated: December 21, 2025 · By FinToolSuite Editorial
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Switch compounding frequencies and see how APY shifts for the same nominal rate.
Open the calculatorQuick answer
APR is the stated annual rate and often doesn’t include the compounding effect. APY (effective annual yield) is the rate after compounding. When interest compounds more than once a year, APY is usually higher than APR.
Disclaimer
Educational purposes only; not financial advice. Examples are illustrative; real returns vary and investments can go down as well as up. Fees, taxes, inflation, and account rules vary by provider and country.
Definitions
APR (annual percentage rate) is the stated yearly rate, commonly shown for loans or credit. It may exclude the impact of intra-year compounding.
APY (annual percentage yield) reflects the effect of compounding within the year. It’s often used for savings or yield contexts.
Same rate, different result (mini example)
Nominal rate (APR): 5%, principal: £1,000, compounding monthly.
- Effective rate (APY) uses the idea: (1 + r/n)n − 1
- With r = 0.05 and n = 12, APY is roughly 5.12%
- End of year balance: ~£1,051.20 (about £1.20 more than simple 5%)
APY shows the impact of compounding within the year.
How compounding frequency affects APY
More frequent compounding raises the effective annual yield slightly for the same nominal rate. Here’s a 5% nominal rate compared by frequency:
| Frequency | Compounds/year (n) | APY (approx.) |
|---|---|---|
| Yearly | 1 | 5.00% |
| Monthly | 12 | ~5.12% |
| Daily | 365 | ~5.13% |
See more on compounding timing here: daily vs monthly vs yearly compounding.
APR/APY and effective annual rate
APY is effectively an “effective annual rate” for savings or yields. You may see EAR used in broader contexts; the idea is the same: it’s the annualized rate after compounding. Read more in effective annual rate explained.
When APR vs APY matters most
- Comparing savings rates with different compounding schedules.
- Comparing borrowing costs when fees or compounding differ.
- Fees or timing can change the effective rate even if the nominal APR is the same.
Use the calculator
Test a few quick scenarios:
- £1,000 at 5% with yearly vs monthly compounding.
- Add £50/month at the same rate to see the chart shift.
- Try a lower rate (3%) and a higher rate (7%) to see how APY moves.
FAQ
Is APY always higher than APR?
When there is more than one compounding period per year and no fees, APY is typically higher. With yearly compounding only, APR and APY match.
What does APY mean in simple terms?
APY is the annualized rate after applying compounding within the year.
Does daily compounding make a big difference?
It raises the effective rate slightly compared to monthly or yearly; the gap is small compared to changes in rate or time.
Which number should I use in a compound interest calculator?
You can enter the nominal rate and select the compounding frequency to see the effective outcome. APY is the result after compounding.
Is APR used for loans and APY for savings?
APR often appears on borrowing products, while APY appears on savings or yield contexts. Labels can vary by provider.
Can fees change the effective rate?
Yes. Fees or timing can reduce the effective return or increase the effective cost even if the nominal APR is unchanged.
Compare compounding in the tool
Run yearly, monthly, and daily compounding for the same rate to see how APY shifts.
Open the calculator