APR vs APY: Interest, Compounding & Worked Examples

APR and APY are annualized measures used in different financial comparisons. For borrowing, APR can include more than the stated interest rate, depending on the product and the charges included under its rules. For deposits, APY expresses yield with compounding under the stated assumptions. They should not be used as interchangeable labels. Start by identifying whether the offer is a loan, card, savings account or certificate, then read the product’s disclosure. A larger percentage is not inherently better: a higher deposit yield and a higher borrowing cost have opposite practical effects for the customer.

Suppose a hypothetical deposit has a nominal annual interest rate of 6% and compounds monthly, with no fees or balance changes. The monthly rate is 0.5%; compounding it through 12 periods produces an annual yield of approximately 6.17%. A starting balance of $1,000 would earn about $61.68 over that year under those assumptions. This is a mathematical example, not a current account quote. A product advertising 6% APY has already expressed a yield measure; do not add another full round of compounding on top of the advertised APY.

For savings, compare the APY for the balance and period you will actually maintain, including promotional expiration, minimums and fees. For loans, compare equivalent amounts, terms and fee assumptions; a lower APR does not by itself describe every payment-timing or cash requirement. Review variable-rate provisions and whether an advertised figure can change. Keep interest, principal, fees and cash to close separate in a comparison. If two providers use different examples, request comparable disclosures rather than forcing the percentages into a misleading ranking. The measure is useful only when its assumptions match the decision.