APY vs APR

How it works

APR is the simple interest rate before compounding. If you earn 5% APR on $10,000, you get $500 a year — flat.

APY assumes the interest gets reinvested and compounds at the stated frequency. If you earn 5% APR compounded daily, your APY is ~5.13%. The difference comes from earning interest on previously-earned interest.

The relationship: APY = (1 + APR/n)^n − 1, where n is the number of compounding periods per year.

The compounding effect is small at low rates and grows fast at high rates. At 100% APR, daily compounding produces 171% APY.

Example

Two banks advertising the same product differently:

• Bank A: "5.00% APR, compounded monthly" → 5.12% APY
• Bank B: "5.10% APY"

Bank B is the slightly better deal — same money, you get $5,100/year on a $100k deposit vs Bank A's $5,116/year. Wait, A is actually better. The point is: comparing APR-vs-APY without doing the math gets you in trouble. Always compare APY to APY.

US banks are required by Truth in Savings Act (Regulation DD) to publish APY for deposit accounts. Loans are required to publish APR. So when borrowing, you see APR; when saving, you see APY. Crypto platforms vary — some publish APY, some APR, some both.

Why it matters

When borrowing, APR matters most because it's typically lower than APY (compounding works against you):

• A "5% APR" loan compounded daily costs 5.13% in actual interest paid.
• A "5% APY" loan would mean you owe 5% even before compounding — comparatively worse.

When earning, APY matters most because it captures the actual return:

• A "5% APR" savings account compounded monthly only nets 5.12% — slightly better than 5% flat.
• A "5% APY" account already includes the compounding — what you see is what you get.

DeFi yields almost always quote APY to make returns look bigger. A "12.7% APY" position is more attractive-looking than the equivalent "12% APR." Both numbers are correct; just know which you're being shown.

For very high crypto yields (50%+ APY), the math diverges sharply — and those yields are usually unsustainable anyway, propped up by token incentives that wind down. Don't compound the headline rate forward in your head; treat the displayed APY as a snapshot, not a guarantee.