APY vs APR — Two Acronyms, Two Directions, One Compounding Difference

APY and APR both describe a yearly rate, and they are not the same number. The difference is compounding, and each acronym sits on the side of the ledger where it makes its product look better.

The definitions

APR, annual percentage rate, is the yearly rate without compounding inside the year, plus, on loans, certain required fees. APY, annual percentage yield, is the effective yearly rate after compounding is included. A 5 percent rate compounded monthly works out to about 5.12 percent APY: each month's interest joins the balance and earns in the following months.

Why each side quotes what it quotes

Savings products advertise APY because compounding pushes the number up. Lenders advertise APR because omitting intra-year compounding keeps the number down; a card with a 24 percent APR compounding daily costs about 27 percent effectively over a year. Both disclosures are regulated and legitimate. The asymmetry is simply that each industry leads with the flattering figure, which makes cross-type comparisons misleading by default.

Comparing honestly

Like against like is the whole rule. Savings quotes are compared APY to APY, which US banks must publish. Loan quotes are compared APR to APR, including fees. And on the savings side there is a second honest step: the quoted APY is pre-tax, and interest is taxed as ordinary income, so the kept rate is lower and varies by state. The free After-Tax Yield Calculator and the companion state-by-state reference do that arithmetic. The Obsidian Metrics community carries the weekly lessons that build on this material.

Educational only. Not financial advice. Results not guaranteed. We are not financial advisors.