Definition

APR vs APY

APR is a nominal annual rate, while APY reflects compounding and effective annual yield or cost.

Improve rate comparisons for savings and borrowing by accounting for compounding effects.

Last reviewed: 2026-03-03 | Review cycle: 120 days | Next review due: 2026-07-01

How It Works

APR is commonly presented for loans, but APY provides an effective annual figure when compounding is relevant.

Products with identical APR can have different effective outcomes if compounding frequency differs.

For apples-to-apples comparisons across products, effective annualized framing is usually superior.

Scenario

Two savings products both quote 5% nominal, one compounds monthly and one yearly.

Outcome

Monthly compounding produces a slightly higher effective annual yield.

Scenario

Loan advertises APR without highlighting compounding cadence.

Outcome

Borrower should evaluate effective annual cost, not only headline APR.

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Is APY always higher than APR?

For positive rates with more frequent-than-annual compounding, APY is usually higher.

Which metric is better for comparing savings products?

APY is usually better because it includes compounding effects.