APY vs APR: The Difference That Costs You Money

Published June 2026 · 4 min read

A bank advertises "5% interest." Sounds great. But is that 5% APR (simple rate) or 5% APY (with compounding)? The difference matters. A 5% APR compounded daily actually gives you a 5.13% APY — that is the real return you earn. Always compare savings accounts and CDs by APY, not the advertised APR.

How to Convert APR to APY

APY = (1 + r/n)^n - 1, where r = APR and n = compounding periods per year. Daily compounding (n=365) gives the highest APY. Monthly (n=12) is next. Annual compounding (n=1) means APY = APR — no compounding benefit. Use our APY Calculator to convert any APR to APY across all compounding frequencies.