APY vs. Interest Rate: What's the Difference?

If you're trying to figure out the difference between APY and interest rate, here's the short answer: interest rate is the base rate you earn or pay, while APY shows the real return after compounding is factored in for your savings/investments. They're not the same, and each is used in different ways depending on the financial product.

In this article, we'll break down the difference between APY and interest rate, where each one is used, and why APY usually gives a more accurate picture of your potential earnings.

If you don't know what compounding is, check out our compounding interest calculator 🇺🇸 to learn more about this topic!

Check out the table below for a quick APY versus interest rate comparison:

In short, interest rate vs annual percentage yield can be summarized to these differences:

• Interest rate (nominal interest rate) is the base percentage you earn (on savings) or pay (on loans) over a period (usually a year) without taking compounding into account.

• APY (annual percentage yield) includes compounding and shows how much you'll earn on savings or an investment in a year (hence the annual) if interest is compounded (daily, monthly, etc.). Banks usually advertise APY when they want to show off the true earning potential of a savings product (and often it's just required by law).

APY is usually used to show how much you earn on deposit accounts that pay interest. You'll see it in relation to:

• Savings accounts;
• Certificates of deposit (CDs);
• Money market accounts;
• High-yield savings accounts; and
• Some investment accounts (but not all).

Banks in many countries are required by regulation to display APY, especially in the U.S. under the Truth in Savings Act. That's because it's more transparent — it shows what you really earn, including the effects of daily or monthly compounding.

So when a bank says earn 5.10% APY, that number already takes into account how often they add interest to your balance.

Use APY to compare savings or interest-earning accounts.

Interest rate is used everywhere, but in most cases, it's the starting point, not the full picture.

You'll see interest rates in:

• Loans and credit cards;
• Mortgages;
• Car financing;
• Student loans;
• Bonds; and
• Some savings accounts (before compounding is applied).

Lenders show the interest rate to make their offer look simple. But it doesn't reflect how often interest is charged (or earned), or how fast the debt grows due to compounding. In savings, banks might mention the interest rate if they want to highlight the base number, especially if it sounds high — but they usually push APY because it's more accurate (and looks better if compounding is frequent).

The interest rate tells you the general idea, but it's not what you'll actually end up earning or paying unless interest is compounded once per year exactly and there are no additional costs.

APY is more accurate — period.

If you're trying to figure out what you'll actually earn from a savings product, APY gives you the real number, assuming you don't withdraw any funds. That's because it includes how often interest is added to your account (daily, monthly, etc.), and how it compounds on top of itself. The interest rate only gives the base rate. If your account compounds monthly, your actual earnings will be higher than the interest rate, but you won't know by how much unless you calculate it.

If you're putting your money into savings, you want the highest APY, not just the highest interest rate.

Here's how to get the most out of it:

1. Choose accounts that compound daily or monthly. The more frequent the compounding, the better.
2. Don't withdraw often. APY assumes you leave the money untouched. If you're taking money out, the actual return will be lower, but of course you can calculate that with our APY calculator 🇺🇸.
3. Compare APY, not just the interest rate. Two banks offering 4.50% interest can give different APYs if they compound differently.

And if you're dealing with debt, like a loan or credit card, know that the interest rate doesn't show the full cost. If the loan compounds interest monthly or daily, you're paying more than the number you see. So whether you're saving or borrowing, always check how interest is calculated — and focus on APY when comparing earnings.

When you're comparing financial products, it's almost always better to look at APY instead of just the interest rate. That's because APY gives you the real return after compounding is counted in. If the account or a product adds interest daily or monthly (which most savings accounts do), then APY tells you what you'll actually earn by the end of the year — not just what the base rate is.

In most savings-related products, APY is what banks are required to show. It's more transparent, and makes it easier to compare different offers without having to do any math yourself. So if APY is visible, trust it more than the plain interest rate.

But there are cases when APY isn't shown — or doesn't matter much. For example, a short-term personal loan might just have a fixed interest rate with no compounding involved, so the interest rate gives you the whole picture. Or, if you're looking at bonds, sometimes you'll only see the flat rate unless compounding is explained separately.

So in short: use APY when it's available, and use the interest rate when there's no compounding or APY listed.

No, APY is not the same as interest rate, even though they’re often used together.

• APY takes the interest rate and applies compounding to show your true earnings in a year.
• Interest rate is just the flat, annual rate — nothing more.

The two numbers can be close if interest is compounded only once a year. But if it compounds more often (which it usually does), APY will always be a bit higher than the stated rate. So if you're wondering, "Is APY the same as interest rate?" the answer is no. They’re related, but APY gives a more complete picture.

Written by: Dawid Siuda