🎯 In 30 seconds: The interest rate is the raw yearly percentage. APY (annual percentage yield) adds the effect of compounding and is the number savings accounts and CDs quote. APR (annual percentage rate) is the yearly cost of a loan, including some fees. Compare APY to APY when saving and APR to APR when borrowing, and always check how long a rate lasts.
Three numbers, three jobs
| Interest rate | The base percentage the bank or lender applies. Says nothing about how often interest is added or what fees you pay. |
| APY | What a deposit earns in a year with compounding included, assuming the money stays put for 365 days. Used for savings, money market accounts and CDs. |
| APR | What a loan costs per year, with certain fees folded in. Used for credit cards, auto loans, personal loans and mortgages. |
The trap is comparing across types: a savings ad showing an APY and a loan showing an APR are not measured the same way. Within one type, the quoted number is built to be comparable from bank to bank.
How compounding turns a rate into an APY
Compounding means interest is paid on earlier interest. The more often it is added, the higher the yearly result. Federal Truth in Savings rules (Regulation DD) set the formula banks use, so one bank’s APY can be compared with another’s.
Worked example. $10,000 at a 4.00% interest rate for one year:
| Compounding | APY | Interest after a year |
|---|---|---|
| Once a year | 4.00% | $400.00 |
| Quarterly | 4.06% | $406.04 |
| Monthly | 4.07% | $407.42 |
| Daily | 4.08% | $408.08 |
The difference between monthly and daily compounding is less than a dollar here. The difference between an average bank and a good one is usually far larger, which is why the APY itself matters more than the compounding schedule. See the live spread on Today’s Rates.
Why a loan’s APR can be higher than its rate
APR folds in charges you pay to get the loan, such as an origination fee or mortgage points. Two loans with the same interest rate can have different APRs if their fees differ.
Worked example. A $10,000 personal loan at 10% for 36 months has a payment of about $322.67. If the lender keeps a $500 origination fee and hands you $9,500, you still repay the full $10,000 plus interest. Measured on the money you actually received, the APR works out to about 13.6%.
One more wrinkle: APR does not show compounding. A credit card quoting a 22% APR usually charges a daily rate (the APR divided by 360 or 365) on each day’s balance, so carrying a balance all year costs a bit more than 22%.
How teaser rates work
A promotional rate is real, but it often comes with limits. Common ones:
- Time limit: the headline APY lasts a few months, then drops to the standard rate.
- Balance cap: the top rate applies only up to a set amount, and the rest earns less.
- Conditions: direct deposit, a minimum number of debit card uses, or a minimum balance.
- Variable rate: a savings APY can change any time, even without a promotion.
Worked example. $20,000 earning a 5.00% APY for 3 months, then 3.00%, ends the year with about $699 of interest. The same $20,000 at a steady 4.00% APY earns $800. The lower headline wins.
A quick comparison checklist
- Saving: compare APY to APY, never a rate to an APY.
- Check whether the rate is fixed (CD) or variable (savings).
- Find any time limit or balance cap on the rate.
- Borrowing: compare APR to APR for loans of the same length.
- For a card, check whether you get a grace period when you pay in full.