Is a higher APY always better?

For savings, yes — a higher APY means you earn more interest. For a loan you'd instead want the lowest rate, since there you are the one paying.

Why do banks quote APY on savings but APR on loans?

Each makes the offer look best: APY, which includes compounding, looks bigger on savings, while APR, which excludes it, looks smaller on loans.

How do I convert APR to APY?

Use APY = (1 + APR/n)^n − 1, where n is the number of times interest compounds per year. For 6% compounded monthly, that gives about 6.17%.

APR vs APY: What's the Difference?

Published 11/13/2025 · 2 min read · Finance calculators

Camille Laurent — Finance writer at Allin

Tax · Personal finance

Checked against 2 sources

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In short

APR (annual percentage rate) is the simple yearly rate and ignores compounding; APY (annual percentage yield) includes it, so APY is the true annual figure. At 12% compounded monthly, the APR is 12% but the APY is 12.68%. For savings you want a high APY; for borrowing you want a low APR — and always compare like with like.

APR and APY both describe a yearly rate, but only APY includes compounding. Here's what each means and which one actually matters for savings and loans.

What APR means

APR is the nominal annual rate — the headline percentage before compounding is taken into account. On loans and credit cards it often also bundles certain fees, giving a fuller picture of borrowing cost. But because it ignores how often interest is added within the year, it understates what you actually pay when interest compounds.

What APY means

APY is the effective annual rate — what you truly earn or pay once compounding is included. Because interest that is added starts earning interest itself, the APY is always at least as high as the matching APR, and higher when interest compounds more than once a year. It is the honest number for comparing offers.

Why they differ

The gap between them is compounding frequency. The conversion is APY = (1 + r/n)^n − 1, where r is the APR as a decimal and n the number of compounding periods a year. Take 12% compounded monthly: (1 + 0.12/12)^12 − 1 = 12.68%. Daily compounding pushes it a touch higher again; yearly leaves APR and APY equal.

Which one to compare

Compare savings by APY and loans by APR — and beware that firms quote whichever flatters them. A savings account shows APY because compounding makes it look bigger; a lender shows APR because it looks smaller. To compare two offers fairly, convert them to the same measure first.

APR vs APY at a glance
Aspect	APR	APY
Includes compounding?	No	Yes
Usually quoted on	Loans, credit cards	Savings, deposits
Higher number is	Worse (you pay more)	Better (you earn more)

Worked with our own calculator

APY calculator

Given

Nominal rate (%): 4.5
Compounding: Yearly

Result

APY: 4.5%

These figures are produced by the calculator below, not typed in by hand — they are recomputed whenever the tool changes.

Run it on your own figures →

Frequently asked questions

Is a higher APY always better?: For savings, yes — a higher APY means you earn more interest. For a loan you'd instead want the lowest rate, since there you are the one paying.
Why do banks quote APY on savings but APR on loans?: Each makes the offer look best: APY, which includes compounding, looks bigger on savings, while APR, which excludes it, looks smaller on loans.
How do I convert APR to APY?: Use APY = (1 + APR/n)^n − 1, where n is the number of times interest compounds per year. For 6% compounded monthly, that gives about 6.17%.

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Sources

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