APR, APY, nominal and effective rates: what is the difference?
Why a loan and a savings account can both say “5 %” and still mean different things, and how to compare rates fairly.
· Awaiting human editorial review
One number, several meanings
Interest rates are quoted per year, but interest is usually charged or paid more often than once a year — monthly on most loans, daily on many savings accounts. How a rate is quoted depends on whether that more frequent compounding is included in the headline number.
A nominal rate is the simple yearly figure: the rate per period multiplied by the number of periods. A loan charging 1 % a month has a nominal rate of 12 %. An effective rate includes compounding, so the same loan has an effective annual rate of (1.01)¹² − 1 ≈ 12.68 %.
APR is mostly about cost; APY is about yield
APR (annual percentage rate) is the figure lenders are usually required to disclose. In many jurisdictions it is a nominal rate that also spreads certain upfront fees over the life of the loan. Because fees are included, a loan with a low headline rate but high fees can have a higher APR than a loan with a slightly higher rate and no fees.
APY (annual percentage yield) is the deposit-side counterpart. It is an effective rate: it already includes compounding, so it tells you how much a balance actually grows in a year. When comparing savings accounts, compare APYs, not stated rates.
How to compare offers
Compare like with like. For two loans, compare APRs over the same term, and look at the total amount you will repay. For savings, compare APYs. If one product quotes a nominal rate and another an effective rate, convert one of them first — the effective annual rate calculator and the nominal interest rate calculator do this in either direction.
Remember that fees, promotional periods and variable rates can change the real cost. The APR calculator shows how much an upfront fee raises the true rate, and the loan comparison calculator puts two offers side by side.