Question 1

What's the main difference between APR and APY?

Accepted Answer

APR is the simple interest rate without accounting for compounding, while APY includes the effects of compound interest. APY is always equal to or higher than APR for the same interest rate, with the difference depending on compounding frequency.

Question 2

Can APY ever be lower than APR?

Accepted Answer

No, APY cannot be lower than APR for positive interest rates. At minimum, with annual compounding, APY equals APR. With any more frequent compounding, APY will always be higher due to the compound interest effect.

Question 3

Do banks have to disclose both APR and APY?

Accepted Answer

Banks are required to disclose the appropriate rate based on the product type. The Truth in Savings Act requires APY disclosure for deposit accounts (savings, CDs), while the Truth in Lending Act requires APR disclosure for most loan products.

Question 4

How much difference does compounding frequency really make?

Accepted Answer

The impact varies with the interest rate and time period. For a 5% rate over one year, moving from annual to daily compounding adds approximately 0.127 percentage points. On $100,000 over 30 years, the difference between annual and daily compounding is approximately $11,850 in additional earnings.

Question 5

Should I always choose daily compounding over monthly?

Accepted Answer

While daily compounding is mathematically superior at the same APR, consider the entire package: fees, minimum balances, accessibility, and other features. Sometimes an account with monthly compounding but no fees and better terms is superior to one with daily compounding but high fees.

Question 6

What's the highest possible APY for a given APR?

Accepted Answer

The theoretical maximum is continuous compounding, calculated as e^APR - 1, where e is Euler's number (2.71828). For 5% APR, continuous compounding yields approximately 5.1271% APY. Daily compounding (5.1268% APY) is already extremely close to this theoretical maximum.

Question 7

Does mortgage APR include closing costs and fees?

Accepted Answer

Yes, mortgage APR is required to include most loan fees and closing costs spread over the loan term, making it higher than the note rate. This makes mortgage APR different from simple interest APR and more useful for comparing total loan costs.

Question 8

Is APY the same as compound annual growth rate (CAGR)?

Accepted Answer

They're similar but not identical. APY assumes consistent interest rate and regular compounding throughout the year. CAGR is typically used for investments that don't have regular compounding but instead represent the annualized return between a starting and ending value, smoothing out volatility.

Question 9

Why do banks advertise APR for loans and APY for savings?

Accepted Answer

Banks strategically choose which rate to advertise to make products appear more attractive. APR appears lower (making loans look cheaper), while APY appears higher (making savings look more lucrative). This is legal marketing psychology - they must still disclose both rates in agreements.

Question 10

How do I convert APR to APY?

Accepted Answer

Use the formula: APY = (1 + APR/n)^n - 1, where n is the number of compounding periods per year. For example, with 5% APR and monthly compounding (n=12): APY = (1 + 0.05/12)^12 - 1 = 5.116%. This calculator does this conversion automatically.

APR vs APY Calculator

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