APR to APY Calculator
Convert between Annual Percentage Rate (APR) and Annual Percentage Yield (APY) using the calculators below.
How to Use Our Calculator
Our calculator offers two simple conversion options:
- Converting APR to APY: Enter your APR percentage and select how often compounding occurs (monthly, quarterly, etc.)
- Converting APY to APR: Enter your APY percentage and indicate the compounding frequency
Simply select the appropriate tab, input your values, and click the conversion button to get your result. The calculator will show detailed calculations so you understand exactly how the conversion works.
What is APR (Annual Percentage Rate)?
Definition and Basic Concept
APR, or Annual Percentage Rate, represents the simple annual interest rate charged on loans or earned on investments. It’s the base rate before accounting for compounding effects.
How APR Works
When a financial institution advertises an APR, they’re telling you the yearly interest rate without considering how often that interest compounds. For example, a credit card with 18% APR means you’re charged interest at a rate of 18% per year, but the actual amount you’ll pay depends on how frequently that interest is calculated.
Where You’ll Encounter APR
APR is commonly used for:
- Credit card interest rates
- Mortgage loans
- Auto loans
- Personal loans
What is APY (Annual Percentage Yield)?
Definition and Real Impact
APY, or Annual Percentage Yield, shows the actual annual return on an investment or cost of a loan when accounting for compounding effects. It represents what you truly earn or pay over a year.
The Power of Compounding
Compounding occurs when interest is calculated not just on the principal amount but also on previously accumulated interest. The more frequently compounding occurs, the higher the APY will be compared to the stated APR.
Where You’ll See APY
APY is typically used for:
- Savings accounts
- Certificates of deposit (CDs)
- Investment returns
- Some loan products
Why the Difference Between APR and APY Matters
Practical Example: Savings Account
Let’s say you deposit $10,000 in a savings account with 5% APR:
- With annual compounding, your APY equals 5%, giving you $10,500 after one year
- With monthly compounding, your APY becomes 5.12%, resulting in $10,512 after one year
- With daily compounding, your APY rises to 5.13%, yielding $10,513 after one year
The difference might seem small initially, but it grows significantly over time and with larger principal amounts.
Practical Example: Credit Card Debt
If your credit card charges 18% APR:
- With annual compounding, you’ll pay exactly 18% interest yearly
- With monthly compounding (which most credit cards use), you’ll actually pay 19.56% annually (the APY)
This 1.56% difference translates to significant additional costs on large balances.
The Mathematical Relationship Between APR and APY
Converting APR to APY
The formula to convert APR to APY is:
Where n = number of compounding periods per year
Converting APY to APR
The formula to convert APY to APR is:
Where n = number of compounding periods per year
How Financial Institutions Use APR and APY in Marketing
Financial institutions strategically choose which rate to advertise:
- When lending money: They typically advertise the APR, which appears lower than the APY, making loans seem less expensive
- When accepting deposits: They highlight the APY, which is higher than the APR, making investments seem more attractive
Understanding this marketing tactic helps you make better comparisons between financial products.
FAQs About APR and APY
Q. Which is better: higher APR or higher APY?
When you’re earning money (through savings or investments), a higher APY is better. When you’re paying money (through loans or credit cards), a lower APR is better.
Q. Why does compounding frequency matter?
More frequent compounding leads to a greater difference between APR and APY. This affects how much you’ll actually earn on investments or pay on debts over time.
Q. Can APR and APY ever be the same?
APR and APY are identical only when compounding occurs exactly once per year. In all other scenarios, APY will be higher than APR.
Q. How can I quickly estimate APY from APR?
For monthly compounding, you can roughly estimate that APY is about 1-2% higher than APR for typical interest rates. For accurate calculations, use our calculator.
Q. Which rate should I focus on when comparing financial products?
Always compare like with like: APR to APR, or APY to APY. If different rates are provided, convert them to the same type using our calculator before making decisions.
Conclusion
Understanding the difference between APR and APY empowers you to make more informed financial decisions. The gap between these rates grows wider with higher interest rates and more frequent compounding. By knowing exactly what you’ll earn or pay, you can better evaluate investment opportunities and loan offers.
Whether you’re saving for retirement, taking out a mortgage, or choosing a credit card, consider both the stated rate and how often compounding occurs. Use our calculator to quickly convert between APR and APY, ensuring you’re comparing financial products accurately and selecting the most favorable options for your situation.
