Understand the difference between Annual Percentage Rate (APR) and Annual Percentage Yield (APY). See how compounding frequency affects your actual returns.
| Compounding Frequency | Periods/Year | APR | APY | $10,000 After 1 Year |
|---|
APR (Annual Percentage Rate) is the nominal interest rate without taking compounding into account. It's the stated rate you see on loans and credit cards.
APY (Annual Percentage Yield) is the effective annual rate that accounts for compounding. It tells you what you actually earn or pay over a full year.
The formula: APY = (1 + APR/n)n - 1 where n is the number of compounding periods per year. With continuous compounding: APY = eAPR - 1. More frequent compounding always produces a higher APY — even if the APR stays the same. This is why banks advertise APY for savings accounts but APR for loans.