APY — the rate that measures what you earn
APY (Annual Percentage Yield), by contrast, is how much your deposited money actually grows in a year, and crucially it reflects compounding. The U.S. Truth in Savings Act (Regulation DD) requires deposits to disclose APY by a standard formula, so accounts that compound monthly or daily can be compared on equal footing.
Regulation DD's formula is of the form APY = 100 × [(1 + Interest/Principal)^(365/Days) − 1], designed so the frequency of compounding shows up in the result. The basics of compounding and time value are unpacked in Compound Interest and the Rule of 72 and The Time Value of Money.
At the same nominal rate, APY is greater than or equal to APR
So at the same nominal annual rate, APY — which reflects compounding — is greater than or equal to APR, and the gap widens the more often it compounds. For example, a nominal 5% compounded monthly works out to an effective yield of about 5.12%. The higher the nominal rate, the larger the gap: a nominal 22% compounded monthly comes to roughly 24.4% (these are illustrative calculations from the formula, not the terms of any specific product).
The practical takeaway is clear. Debt that accrues interest daily on the balance (compounding), like a credit card, can carry a heavier effective cost over a year than the stated nominal APR suggests. Savings, conversely, should be compared by APY so you're weighing true, compounding-inclusive returns apple-to-apple.
| Aspect | APR | APY |
|---|
| Mainly used for | Loans, credit cards (borrowing) | Deposits, savings (earning) |
| Reflects compounding | Usually not (nominal) | Yes (effective) |
| U.S. basis | Truth in Lending (Reg Z) | Truth in Savings (Reg DD) |
| At the same nominal | Lower or equal | Higher or equal |
Reading it outside the U.S. — check the definition, not the acronym
APR and APY are terms from the U.S. disclosure system. Other countries use their own phrasing, and simple vs compound, pre- vs post-tax, and whether bonus conditions apply all vary by product. So the point isn't memorizing English acronyms — it's the habit of checking, each time, whether the "% a year" in front of you reflects compounding and includes fees and taxes. For exact figures and terms, check each provider's official product disclosures and regulator guidance.
✍️ Operator's note — I used to put both on the same scale just because the words said "% a year." Once I learned that the borrowing number (APR) and the saving number (APY) are built by different formulas to begin with, I got careful about the comparison itself. Debt tends to look lighter as a nominal figure and heavier once you compound it; savings the reverse. Remember just that asymmetry and you get fooled by the number a lot less.
Price instinct grows by guessing for yourself
An interest rate is, in the end, the price of money. The muscle for reading prices grows only by gauging them often. Build number sense across PriceGuess's modes, and for how interest and inflation tangle with asset prices, read Interest Rates and Asset Prices; for where your own money leaks, read Household Budget Literacy.
This article is educational content explaining interest-rate concepts and is not investment advice to choose any specific financial product. For the actual applied rates, fees, and taxes, check providers' official materials and regulator guidance directly.
