APR vs. APY: What’s the Difference?
Learn why nominal annual rates and effective annual yields differ when interest compounds.
APR describes a nominal annual rate
A nominal APR states a yearly percentage before the effect of intra-year compounding is incorporated. For some consumer borrowing products, the disclosed APR may include certain fees as well as interest. Always read the specific lender disclosure rather than assuming one definition covers every product.
APY accounts for compound interest
APY translates periodic compounding into one effective annual growth rate. For a simple nominal rate without fees, APY = (1 + APR/n)^n − 1.
For example, 12% nominal interest compounded monthly produces approximately 12.68% APY, not exactly 12%.
Compare like with like
When comparing deposit accounts, APY often describes how compounding affects credited interest. When comparing credit agreements, borrowing costs can include charges beyond the raw nominal interest rate. Verify payment schedule, fee treatment and promotional terms.
- Look for the compounding frequency.
- Distinguish promotional from ongoing rates.
- Check fees and balance assumptions.
Further reading and primary sources
These external references explain related financial concepts and rules. They do not verify your personal calculation.