APR vs. APY: Nominal and Effective Rates Explained

APR and APY look alike and both describe a yearly percentage, but they answer different questions. APR, the annual percentage rate, is the standard measure of what credit costs. APY, the annual percentage yield, is the standard measure of what a deposit account earns. They are defined by different federal regulations, built in different ways, and meant for different comparisons. Mixing them up can make one offer look better than it is.

Nominal and effective rates

Every quoted interest rate is either nominal or effective.

• A nominal rate is a yearly rate that is divided into smaller periods without accounting for compounding. A 6% nominal rate paid monthly means 0.5% each month.
• An effective rate is the growth that actually happens over a full year once each period’s interest starts earning interest of its own. Twelve months at 0.5% compounds to (1.005)^12 − 1 ≈ 6.1678%, so the effective rate is about 6.17%.

The general conversion for a nominal rate r compounded n times a year is:

Effective annual rate = (1 + r/n)^n − 1

The more often interest compounds, the further the effective rate sits above the nominal one, though the gains shrink as frequency rises. APY is an effective rate. APR on most installment loans is a nominal rate.

What APY measures

APY is set out in Regulation DD, which implements the Truth in Savings Act. Banks and credit unions disclose it alongside the interest rate on deposit accounts, along with how often interest is compounded and credited. Appendix A of Regulation DD gives the calculation: APY reflects the interest a deposit would earn over the account’s term relative to the principal, annualized on a 365-day year. For an account without a fixed term it works out to one year of interest as a percentage of the deposit, compounding included. Section 1030.3 requires the APY to be rounded to the nearest hundredth of a percentage point.

Here is $10,000 left for one year at a 4.5% interest rate under different compounding frequencies:

Compounding	APY	Balance after 1 year
Annually	4.5%	$10,450.00
Quarterly	4.5765%	$10,457.65
Monthly	4.594%	$10,459.40
Daily (365)	4.6025%	$10,460.25
Continuously	4.6028%	$10,460.28

The compound interest calculator shows the APY for any rate and compounding choice, and projects the balance over longer periods.

Comparing savings offers by APY

Suppose three accounts advertise these terms:

• Account A: 4.40% compounded daily. APY 4.498%, disclosed as 4.50%.
• Account B: 4.45% compounded annually. APY 4.45%.
• Account C: 4.42% compounded monthly. APY 4.5107%, disclosed as 4.51%.

B has the highest stated rate but the lowest APY. On $10,000 over one year, A ends at $10,449.80, B at $10,445.00 and C at $10,451.07. Ranking by APY puts them in the correct order, which is the purpose of the disclosure. Over a single year the differences are a few dollars; on larger balances or longer periods they grow.

APY does have limits. It assumes the rate stays the same for the full year, while many savings rates are variable and can change after you open the account. It also excludes most fees, which reduce what you actually earn, and it says nothing about penalties for early withdrawal from a CD.

What APR measures

APR is defined by Regulation Z, which implements the Truth in Lending Act. As the CFPB explains, a loan’s interest rate is the cost of borrowing the principal, while the APR combines the interest rate with certain other charges, such as origination fees, expressed as a yearly rate. Because it folds those charges in, the APR is usually higher than the interest rate when fees apply.

Section 1026.22 sets out how lenders must calculate it and how precise the result must be. For a regular loan, a disclosed APR counts as accurate if it is within one-eighth of one percentage point of the true figure; for irregular transactions the tolerance is one-quarter of a point.

How fees raise the APR

Take a $10,000 loan at 8% for 36 months, with a $300 origination fee taken out of the loan proceeds.

1. The payment is based on the full $10,000 at 8%: $313.36 a month.
2. The borrower receives only $9,700 after the fee.
3. The APR is the rate at which 36 payments of $313.36 exactly repay $9,700. Solving for that rate gives an APR of about 10.08%.

The interest rate is still 8%, and the loan calculator uses that rate to find the payment. The APR captures the extra cost of the fee in a single comparable figure.

Comparing loan offers by APR

For $20,000 over 60 months:

Offer	Interest rate	Fee	Monthly payment	Interest	Interest plus fee	APR
A	7.5%	$0	$400.76	$4,045.54	$4,045.54	7.5%
B	6.9%	$600	$395.08	$3,704.86	$4,304.86	about 8.18%

Offer B has the lower rate and the lower payment, but once the fee is included it costs about $259 more, and its higher APR reflects that. The APR for B assumes the fee is deducted from the proceeds. The CFPB’s guidance is to compare APRs with APRs, not an APR with another lender’s interest rate.

For mortgages, the APR adds items such as points and broker fees. It is a useful summary, but it spreads up-front costs over the full term, so a loan you expect to sell or refinance within a few years can compare differently than the APR suggests. The mortgage calculator uses the note rate to estimate the payment.

APR does not include compounding

On a loan with monthly payments, the APR is the monthly rate multiplied by 12. It does not compound the way APY does. A 7.5% APR on a car loan corresponds to a monthly rate of 0.625%, and twelve months of that compounds to an effective annual rate of about 7.7633%. The gap comes from the convention used to state the rate; it does not mean the lender is charging more than disclosed, only that APR and APY use different conventions.

Credit cards

The CFPB notes that credit card interest rates are typically stated as a yearly rate, the APR. Issuers often apply it through a daily periodic rate: 24% ÷ 365 ≈ 0.0658% a day. If a balance carried for a whole year had interest compounded monthly at 24% APR, the effective annual rate would be about 26.82%; compounded daily, about 27.11%. Paying the full statement balance by the due date generally avoids interest on purchases altogether.

Quick reference

	APR	APY
Used for	Loans and credit	Savings, CDs and other deposit accounts
Regulation	Regulation Z (Truth in Lending)	Regulation DD (Truth in Savings)
Includes compounding	No, for most installment loans	Yes
Includes fees	Certain finance charges	No, interest only
Higher number means	Higher cost to borrow	More earned on deposits
Compare against	Other APRs	Other APYs

Common mistakes

• Comparing an APR to an APY. One is nominal and includes fees; the other is effective and excludes them.
• Comparing a stated rate to an APY. A savings account’s rate and its APY differ whenever interest compounds more than once a year.
• Entering an APR into a payment calculator as the interest rate. When the APR includes fees, the payment comes out slightly too high.
• Assuming the APY is guaranteed. On variable-rate accounts, the APY reflects today’s rate only.
• Ignoring the time horizon. APR spreads fees across the full term, so it is most accurate for loans kept to maturity.

For a broader look at how interest builds on itself, see the guide to simple vs. compound interest.

Sources

1. Appendix A to Part 1030 — Annual Percentage Yield Calculation — Consumer Financial Protection Bureau (Regulation DD). Checked October 4, 2026.
2. § 1030.3 General disclosure requirements — Consumer Financial Protection Bureau (Regulation DD). Checked October 4, 2026.
3. § 1030.4 Account disclosures — Consumer Financial Protection Bureau (Regulation DD). Checked October 4, 2026.
4. § 1026.22 Determination of annual percentage rate — Consumer Financial Protection Bureau (Regulation Z). Checked October 4, 2026.
5. What is the difference between a loan interest rate and the APR? — Consumer Financial Protection Bureau. Checked October 4, 2026.
6. What is a credit card interest rate? What does APR mean? — Consumer Financial Protection Bureau. Checked October 4, 2026.