APR vs APY

A practical method

APR and APY are annual percentage measures built for different comparisons. APR commonly describes an annualized borrowing rate and may be presented without the effect of intra-year compounding. APY describes the effective annual growth of a deposit or investment after compounding. Fees and disclosure rules can affect what a quoted figure includes.

1. Identify the product: For credit, inspect APR and total cost; for savings, APY is usually the effective-yield comparison.
2. Match the compounding period: A nominal rate compounded more frequently can produce a higher effective annual result.
3. Check fees and conditions: Account fees, promotional periods, balance requirements, and variable rates can dominate a small rate difference.
4. Compare on the same basis: Use the same amount, time period, contribution pattern, and fee assumptions for every offer.

Worked example

A nominal 5% rate compounded monthly has an effective annual yield of about (1 + 0.05/12)^12 − 1 = 5.12%. The difference looks small for one year but compounds over longer periods. This illustration excludes taxes, fees, and changing rates.

Checks, edge cases, and common mistakes

• Do not compare one product's nominal rate with another product's effective annual yield.
• Verify whether an APR includes mandatory fees under the relevant disclosure regime.
• Promotional rates may expire or apply only to part of the balance.
• Use the calculator for scenarios, not as a substitute for a lender's or bank's official disclosure.