APR vs. APY
The same interest rate can be advertised two different ways — and lenders and banks each pick the one that makes their number look smaller or bigger, depending on which side of the deal they’re on.
What Is It
APR (Annual Percentage Rate) is the simple annualized interest rate, without accounting for compounding within the year. APY (Annual Percentage Yield) does account for compounding, so it’s always equal to or higher than the nominal rate it’s derived from. Loans and credit cards are quoted in APR; savings accounts and CDs are quoted in APY. When compounding happens only once a year, the two numbers actually converge to the same figure — the gap only opens up once interest starts compounding more than annually.
Why It Matters
This isn’t a coincidence — it’s why each side of a transaction uses the number that looks better for them. A bank advertising a savings account wants to show APY, since compounding makes the number bigger and more attractive. A lender advertising a loan or credit card is required to disclose APR, which — because it ignores compounding — understates the true annualized cost compared to how often interest actually compounds on the balance.
The gap between the two numbers grows with how frequently compounding happens — monthly compounding produces a small gap between APR and APY, while daily compounding, common on credit cards, produces a much larger one. That’s also why the APR printed on a loan disclosure never quite tells the whole story on its own — the compounding frequency, which usually isn’t advertised nearly as prominently, is what actually determines the true annual cost.
Quick Example
A 5% APR compounding monthly works out to a 5.12% APY. On a credit card specifically, where interest often compounds daily, a 24% APR translates to an effective 27.11% APY — over three percentage points higher than the number on the card’s disclosure, purely from how often compounding happens. Neither figure is wrong; they’re just answering different questions about the exact same underlying rate.
Convert your own rate: