APR vs APY — What's the Difference and Why It Matters

APR (Annual Percentage Rate)

APR is the nominal interest rate — the simple percentage before compounding is applied. A bank advertising “5% APR compounded daily” means:

• Daily rate = 5% ÷ 365 = 0.01370% per day
• This rate is applied to your balance every day, including previously earned interest

APR tells you the base rate but not what you’ll actually earn or pay.

APY (Annual Percentage Yield)

APY includes the effect of compounding and shows your real annual return. The formula:

APY = (1 + r/n)^n − 1

For 5% APR compounded daily: APY = (1 + 0.05/365)^365 − 1 = 5.127%

APR to APY Conversion Table

APR	Daily (APY)	Monthly (APY)	Annual (APY)
3%	3.045%	3.042%	3.000%
4%	4.081%	4.074%	4.000%
5%	5.127%	5.116%	5.000%
6%	6.183%	6.168%	6.000%
7%	7.250%	7.229%	7.000%
8%	8.328%	8.300%	8.000%

When to Use Which

For savings and investments — compare APY:

• APY tells you exactly how much you earn in a year
• Higher APY = more money in your pocket
• Banks must disclose APY for deposit accounts

For loans and credit cards — look at APR:

• APR is the standard disclosure for loans
• Lower APR = less interest you pay
• Note: credit cards often compound daily, so effective cost exceeds stated APR

The Practical Difference

On a $50,000 savings balance at 5% APR compounded daily:

• APR suggests you earn: $2,500/year
• APY shows you actually earn: $2,564/year
• The compounding bonus: $64 extra per year

Over 10 years, that compounding bonus grows to over $800 extra on $50,000.

Key Takeaway

When comparing bank accounts, always compare APY to APY. When you see a rate advertised without specifying APR or APY, ask which it is. Use our compound interest calculator to convert between them instantly.