Annual Percentage Rate (APR) and Annual Percentage Yield (APY) may seem similar, but knowing the difference and how they are used will help you make better financial decisions.

Try entering different values in the APR to APY calulcator to see how they’re related.

Compounding Frequency | APY |
---|---|

Annually | 4.00% |

Semi-Annually | 4.04% |

Quarterly | 4.06% |

Monthly | 4.07% |

Weekly | 4.08% |

Daily | 4.08% |

APR (Annual Percentage Rate) is the annual rate of return — expressed as a percentage — before factoring in compound interest. APR only takes into account simple interest. You’ll run into APR most often when considering loan terms, and how much you’ll have to pay to borrow.

*APR = [(Fees + Interest)/Principal] x (Number of Years) x 100*

To calculate APR:

- Add up all fees and interest to be paid over the life of the loan.
- Divide the total fees and interest by the principal.
- Divide the result by the total period of the loan, in years.
- Multiply the result by 100.

The result is your Annual Percentage Rate expressed as a percentage.

Let’s say you would like to calculate how much interest will accrue today on your credit card. Your credit card charges 19.00% APR, compounds daily, and has a balance of $1000.

- Express your APR as a decimal by dividing by 100.
- Divide your APR by the number of compounding periods.
- Multiply this number by your credit card balance.

*Daily Interest Accrued = 1000 x 0.19 / 365*

In this case, your daily interest accrued would be $0.52. This amount would then be added to your balance for tomorrow’s calculation.

**Try it out!**

Calculate the interest that will accrue on your real credit card. Get your credit card APR, compounding frequency, and current balance to calulcate how much interest you’ll accrue during the current period.

APY (Annual Percentage Yield) is the annual rate of return — expressed as a percentage — once you factor in compound interest. It's a standard evaluation of return based on one year. You'll run into this most often when considering deposit accounts, and how much you'll earn on your deposit.

*APY = [1 + (APR / Number of Periods)]^(Number of Periods) - 1*

To calculate APY using APR:

- Take APR and divide it by the number of compounding periods.
- Add 1 to the result.
- Raise the result by the Number of Compounding Periods.
- Subtract 1 from the result.

The result is your Annual Percentage Yield expressed as a percentage.

Let's say you want to calculate how much interest your savings account will pay you after one year. Your savings account pays 2.00% APY, and you have a balance of $1000.

- Express your APY as a decimal by dividing by 100.
- Multiply this number by your account balance.

*Expected Annual Interest = 1000 x 0.02*

In this case, your expected annual interest accrued would be $20.00. Your expected balance at the end of the year would be $1,020.00.

**Try it out!**

Calculate your expected annual interest on your savings account balance. Get your APY and your current balance from your bank’s website to calculate how much interest you’ll earn over the year.

Both terms talk about the same concept, so neither is inherently better. However, because APY takes into account compounding interest, it is usually higher than an equivalent APR. Therefore, if you're comparing the same percentage number, with one as APR and one as APY, e.g. 1.00% APR vs 1.00% APY, it's safe to assume that the APR option will represent a larger return for the lender over the course of a year.

APY | 4.07% |

Inflation Rate (CPI) * | - 8.50% |

Real Interest Rate | -4.43% |
---|

* - The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. CPI measurement taken from bls.gov.

Inflation is the change in prices of everyday goods and services. If inflation increases, then this means that the things you buy are getting more expensive, faster. In the US, it is tracked by the Bureau of Labor Statistics, which it calls the Consumer Price Index.

Real Interest Rate = APY - Inflation Rate