APY vs APR: Why Your Savings Account and Your Loan Advertise Different Numbers

Open a savings account and you'll see APY advertised. Take out a loan and you'll see APR instead. That's not a coincidence, and it's not just different terminology for the same thing, APY and APR genuinely measure different quantities, and the one each product advertises tends to be whichever looks more favorable.

APR (Annual Percentage Rate) is the nominal interest rate, the stated rate before compounding is factored in. APY (Annual Percentage Yield) is the effective rate, what you actually earn or pay once compounding within the year is taken into account. The formula that connects them is APY = (1 + r/n)^n − 1, where r is the APR as a decimal and n is how many times per year interest compounds.

Run the numbers and the gap becomes concrete: a 5% APR compounded monthly produces an APY of about 5.12%, since each month's interest starts earning its own interest for the rest of the year. Compound daily instead of monthly and the APY nudges up further, to roughly 5.13%, approaching but never quite reaching the mathematical limit of continuous compounding. The more frequently interest compounds, the wider the gap between the stated APR and the real APY becomes.

This is exactly why savings accounts and CDs advertise APY, it's the larger, more flattering number, and regulators generally require it to be disclosed for deposit products specifically so customers can compare accounts on a like-for-like effective basis. Loans, on the other hand, advertise APR, since for a borrower the nominal rate looks smaller than the effective rate you'd actually be charged once compounding (and often fees) are folded in.

None of this makes either number "wrong", they're both accurate descriptions of the same underlying interest rate, just measuring it before versus after compounding is applied. The important habit is checking which one you're looking at before comparing two products, comparing an APY on one savings account to an APR on another isn't a fair comparison, since the APY figure already has an inherent advantage baked in.

Our APY Calculator converts a nominal rate and compounding frequency straight into its effective APY, plus shows the actual first-year interest on a deposit amount if you enter one. If you want to project growth over several years rather than a single year's effective rate, our Compound Interest Calculator and Simple Interest Calculator handle the longer time horizon.