Understanding APY vs APR: Key Differences
An APY to APR converter helps you translate between Annual Percentage Yield (APY) and Annual Percentage Rate (APR), two related but distinct measures of returns on savings or costs of borrowing. Understanding the difference is essential for comparing financial products accurately and avoiding marketing tricks that make deals seem better than they are.
How It Works: APY reflects compound interest—it shows what you actually earn or pay after accounting for how frequently interest compounds. APR is the simple annual rate without compounding. The converter uses the formula: APY = (1 + APR/n)^n - 1, where n is the number of compounding periods per year. For example, 5% APR compounded monthly becomes 5.12% APY.
When to Use It: Use this calculator when comparing savings accounts with different compounding frequencies, evaluating loan offers to understand true costs, or converting between APY (common for savings accounts) and APR (common for loans). It's particularly valuable when one institution advertises APY and another advertises APR, making direct comparison impossible without conversion.
Key Concepts: The more frequently interest compounds, the larger the difference between APR and APY. Daily compounding yields more than monthly, which yields more than annual compounding at the same APR. For savings, you want higher APY. For loans, you want lower APR. Banks often advertise whichever number looks better—APY for savings (higher number) and APR for loans (lower number).
Common Mistakes: Comparing APR to APY directly without conversion leads to bad decisions. A 4.5% APY savings account beats a 4.6% APR account with annual compounding. Not checking the compounding frequency means missing the real return. Many people also confuse APR with APY and think they're interchangeable—they're not. For credit cards, daily compounding at 18% APR results in 19.7% APY, meaning you're actually paying nearly 20%, not 18%.
Pro Tips: Always convert to the same metric before comparing financial products. For savings accounts, insist on knowing both the APY and compounding frequency. Online high-yield savings accounts typically compound daily, maximizing returns. For loans, ask for the APY to understand the true cost after compounding. Use this tool to expose marketing sleight-of-hand—a "5% APR" loan that compounds daily costs significantly more than advertised. When evaluating investments or savings, even small APY differences compound dramatically over time: 4.5% APY versus 5.0% APY on $10,000 is a $50 annual difference, but $2,500+ difference over 30 years with regular contributions.