APY Calculator

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What is APR vs APY?

When you see interest rates advertised, you'll encounter two terms: APR and APY. Understanding the difference can save you money and help you make smarter financial decisions.

APR (Annual Percentage Rate) is the simple, nominal interest rate stated on a yearly basis. It doesn't account for compounding—it's just the basic rate.

APY (Annual Percentage Yield) is the actual rate of return you'll earn (or pay) after compounding is factored in. It shows you the real picture.

Think of it this way: APR is what banks advertise, APY is what you actually get.

The APY Formula

The formula to convert APR to APY is:

Where:

• r = APR (as a decimal, e.g., 0.05 for 5%)
• n = Number of compounding periods per year

For continuous compounding:

Example: A savings account offers 5% APR with monthly compounding:

• APY = (1 + 0.05/12)^12 - 1
• APY = (1.004167)^12 - 1
• APY = 5.116%

That extra 0.116% is the benefit of compounding!

Why Compounding Frequency Matters

The more frequently interest compounds, the higher your APY becomes. Here's how the same 5% APR performs with different compounding frequencies:

Notice how daily and continuous compounding are nearly identical. The difference matters more at higher interest rates.

Real-World Examples

Savings Accounts: Most banks advertise APY for savings accounts because it looks better. A 4.50% APY means you'll actually earn 4.50% on your money over a year.

Credit Cards: Credit card companies often advertise APR because it looks lower. Your 24% APR credit card with daily compounding actually costs you 26.82% APY!

Mortgages: Mortgage rates are typically quoted as APR. With monthly compounding, a 7% APR mortgage actually costs you 7.23% APY.

Common Mistakes to Avoid

1. Comparing APR to APY directly – They're different metrics. Always convert to the same type before comparing.

2. Ignoring compounding frequency – Two accounts with the same APR but different compounding frequencies will give you different returns.

3. Forgetting fees – Some accounts have fees that eat into your returns. A higher APY with fees might be worse than a lower APY without fees.

4. Assuming more frequent = always better – The difference between monthly and daily compounding is usually minimal. Don't choose an account solely based on compounding frequency.

5. Not checking the fine print – Promotional APYs often require minimum balances or have time limits.

Tips for Maximizing Your Returns

1. Compare APY, not APR – When shopping for savings accounts or CDs, always compare APY to get an apples-to-apples comparison.

2. Understand your loan costs – When borrowing, convert the APR to APY to understand the true cost of the loan.

3. Check compounding frequency – Ask your bank how often interest compounds. More frequent is better for savings, worse for loans.

4. Consider high-yield savings accounts – Online banks often offer APYs 10-20x higher than traditional banks.

5. Watch for promotional rates – Some accounts offer high introductory APYs that drop after a few months. Read the terms carefully.