You can count on a bank or lender to emphasize whichever of the two will seem more enticing to you. Here's why understanding the difference between APR and APY is important.

First, a quick lesson on compound interest

stacked coins showing a graph of over-proportional growth
fotogestoeber / Shutterstock

Compound interest is a powerful force. It makes your savings— or a debt — grow more quickly by applying interest to the interest already earned or charged.

Let's say you earned 5% interest last year on $100. Your account would have grown to $105. Through compound interest, you'd earn 5% on $105 the following year, rather than on the original $100.

Interest can be compounded — that is, calculated and added to a savings or debt balance — on an annual, quarterly (every three months), monthly or daily basis.

When interest is compounded more frequently, it can result in a mountain of debt, versus manageable debt. Or, your savings can grow much more quickly.

What this means for APR and APY

3d illustration of a magnifying glass over black background with percentage symbols and focus on a golden one.
Olivier Le Moal / Shutterstock

The difference between APR and APY is that APR doesn’t take compound interest into account, but APY does.

APR is the annual or yearly rate of interest, without compound interest factored in. APY builds the compounding into the rate.

A savings vehicle or loan might have an APR of 5% but an APY of 5.09% if the interest is compounded quarterly, or an APY of 5.11% if the compounding is done monthly.

Banks tend to compound the interest on savings accounts on a monthly or daily basis. Mortgage interest is often compounded monthly.

Know: Is it APR? Or APY?

Serious investment broker, financial advisor or bank worker in suit and glasses consulting young couple
fizkes / Shutterstock

A mortgage lender who's trying to get you to sign up for a home loan will make the interest rate sound as low as possible — which means you're more likely to be presented with an APR instead of the APY. Always ask what the APY is.

Meanwhile, when a bank wants your deposit for a savings account, you can expect to hear the savings APY upfront, because it will be higher and so will sound better than the APR.

As you evaluate loans and savings products, make sure you’re comparing APY to APY, or APR to APR, and consider the frequency of compounding.

This all may sound complicated, but all you have to do is remember: when interest is compounded more often, you'll earn — or pay — more.

High-Interest Savings Accounts for January 2020

When selecting the best high-interest savings account for you, look for the highest yield while also considering introductory rates, minimum balances and accessibility.

Bank/Institution APY Min. Balance for APY Est. Earnings
Estimated interest earnings calculation is based on a $25,000 deposit amount for a period of 1 year and rounded to the nearest dollar.
CIT Bank Logo

CIT Bank
1.80%
$25,000
$450
Learn More
Credit Karma Logo

Credit Karma
1.80%
$0.01
$450
Learn More
Marcus by Goldman Sachs
1.70%
$0
$425
Learn More
American Express Personal Savings
1.70%
$1
$425
Learn More

Advertising Disclosure

Many of the savings offers appearing on this site are from advertisers from which the website receives compensation for being listed here. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). These offers do not represent all deposit accounts available.

Disclaimer

Rates/Annual Percentage Yield terms above are current as of the date indicated. These quotes are from banks, credit unions and thrifts, some of which have paid for a link to their website. Bank, thrift and credit unions are member FDIC or NCUA. Contact the bank for the terms and conditions that may apply to you. Rates are subject to change without notice and may not be the same at all branches.

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These articles were created by the MoneyWise editorial team.