The Honest Difference Between APY and APR — and Why It Matters
Banks use APY on savings products because it looks higher. They use APR on loan products because it looks lower. Neither is dishonest — but the convention is deliberately arranged in the bank's favour at both ends. Understanding the difference takes four minutes and will serve you for life.
The Core Difference in One Sentence
APY includes the effect of compounding; APR does not. A 5.00% APR compounded daily becomes a 5.13% APY. A 5.00% APR compounded monthly becomes a 5.12% APY. The more frequently interest compounds, the larger the spread between APR and APY.
The Math
APY = (1 + r/n)^n - 1, where r is the nominal annual rate and n is the number of compounding periods per year. For 5.00% daily: (1 + 0.05/365)^365 - 1 = 5.127%. For 5.00% monthly: (1 + 0.05/12)^12 - 1 = 5.116%. For 5.00% quarterly: (1 + 0.05/4)^4 - 1 = 5.095%. The difference between daily and monthly compounding at 5.00% nominal is 0.011 percentage points — meaningful on large balances over long horizons.
Why Banks Use APY on Savings
The Truth in Savings Act (1991) requires federally insured depository institutions to disclose APY on savings products. This means the rate you see on a savings account comparison table is already compounding-adjusted. You can compare APYs across institutions directly, without doing the math yourself. This is genuinely useful regulation.
Where the Confusion Starts
Mortgages, credit cards, and auto loans are required to disclose APR, not APY. A credit card with a 24.99% APR compounded daily has an effective APY of 28.44%. Lenders are not required to show you that number, and almost none do. So when you are comparing a 5.00% APY on a savings account with a 24.99% APR on a credit card balance you carry, the actual asymmetry is even larger than it appears.
The Practical Implication for Depositors
For deposit accounts, compare APYs — the number is already standardised. For loan products, convert APR to effective APY in your head to understand the true cost of carrying a balance. If your savings account earns 5.00% APY and your credit card charges 24.99% APR (28.44% effective), no amount of savings optimisation compensates for carrying a revolving balance.
Frequently Asked Questions
Is APY always higher than APR?
Yes, when the nominal rate is positive and compounding occurs more than once per year. The more frequent the compounding, the larger the gap. With annual compounding, APY and APR are the same number.
Which number should I compare when shopping CDs?
Always APY. CD disclosures are required to show APY under the Truth in Savings Act, and you can compare them directly across institutions. A 5.00% APY CD at Bank A and a 5.00% APY CD at Bank B earn identically on the same principal over the same term.
Related Products
High-Yield Savings Account
4.50–5.10%
as of May 2026
1-Year Certificate of Deposit
4.60–5.30%
as of May 2026
Primary Sources
- [1] Truth in Savings Act, 12 C.F.R. Part 1030 — consumerfinance.gov
- [2] FDIC Consumer News: Understanding Deposit Rates — fdic.gov