APR vs. APY Calculator
Understand the true cost of borrowing or the actual return on your savings by converting between Annual Percentage Rate (APR) and Annual Percentage Yield (APY). This calculator helps you see the impact of compounding frequency on your rates.
1. Calculate APY from Nominal Rate (APR)
Use this section to find out the Effective Annual Yield (APY) when you know the nominal annual rate and how often interest is compounded.
2. Calculate Nominal Rate (APR) from APY
Use this section to determine the Nominal Annual Rate (APR) required to achieve a specific Effective Annual Yield (APY), given a compounding frequency.
Understanding APR and APY: The True Cost and Return
When you're dealing with loans, savings accounts, or investments, you'll frequently encounter terms like Annual Percentage Rate (APR) and Annual Percentage Yield (APY). While they both represent interest rates, they tell you different things about the actual cost of borrowing or the actual return on your money. Understanding the distinction is crucial for making informed financial decisions.
What is Annual Percentage Rate (APR)?
The Annual Percentage Rate (APR) is the nominal annual rate of interest charged on a loan or earned on an investment. It's typically the advertised rate you see for credit cards, mortgages, car loans, and other forms of credit. APR represents the simple interest rate for a year, but it generally does not account for the effect of compounding interest within that year. In some contexts, especially for loans, APR can also include certain fees and additional costs associated with the loan, giving a more comprehensive picture of the borrowing cost, but without reflecting compounding.
- For Loans: APR is the cost of borrowing money, expressed as a yearly rate. It helps consumers compare different loan products.
- For Savings/Investments: Sometimes, a nominal annual rate is quoted as an APR, which is then used to calculate the APY.
Example: A credit card might advertise an APR of 18%. If interest is compounded monthly, your actual cost will be higher than 18% due to compounding.
What is Annual Percentage Yield (APY)?
The Annual Percentage Yield (APY), also known as the Effective Annual Rate (EAR), is the real rate of return earned on an investment or paid on a loan, taking into account the effect of compounding interest. APY provides a more accurate picture of the total interest earned or paid over a year because it includes the interest earned on previously accumulated interest.
- For Savings/Investments: APY is particularly important for savings accounts, certificates of deposit (CDs), and other investments where interest is compounded. It shows you the true growth of your money.
- For Loans: While less commonly advertised for loans, the effective annual rate (which is essentially APY) would show the true cost of borrowing after compounding.
Example: A savings account might offer a 5% nominal annual rate compounded monthly. The APY for this account would be slightly higher than 5% (e.g., 5.116%), reflecting the benefit of monthly compounding.
The Impact of Compounding Frequency
The key difference between APR and APY lies in compounding frequency. Compounding refers to the process of earning interest on your initial principal *and* on the accumulated interest from previous periods. The more frequently interest is compounded (e.g., daily vs. annually), the greater the difference between the nominal rate (APR) and the effective rate (APY).
- Annually: Interest is added once a year. APR and APY will be the same.
- Semi-annually: Interest is added twice a year.
- Quarterly: Interest is added four times a year.
- Monthly: Interest is added twelve times a year.
- Daily: Interest is added 365 times a year.
The higher the compounding frequency, the higher the APY will be relative to the APR for a given nominal rate. This is why a savings account with a 5% nominal rate compounded daily will yield more than one compounded monthly, even if both have the same nominal rate.
Why Does This Matter?
- For Savers and Investors: Always look for the APY when comparing savings accounts or investment products. A higher APY means your money grows faster. A bank advertising a 5% nominal rate compounded daily is better than one offering a 5% nominal rate compounded annually.
- For Borrowers: While APR is often the headline rate for loans, understanding the effective annual cost (which is like APY for loans) is crucial. Loans with higher compounding frequencies can end up costing you more over time, even if their advertised APRs seem similar.
Using the Calculator
Our calculator helps you bridge the gap between APR and APY:
- Calculate APY from Nominal Rate: If a bank tells you they offer a 4.8% nominal annual rate compounded monthly, you can use the first section to find out your true APY.
- Calculate Nominal Rate from APY: If you want to achieve a specific APY (e.g., 5.5%) with daily compounding, the second section can tell you what nominal annual rate (APR) you'd need.
By using this tool, you can gain a clearer understanding of the actual financial implications of different interest rates and compounding schedules, empowering you to make smarter financial choices.