APR is the yearly rate a lender quotes before compounding. APY is the yearly rate after compounding is included. The two numbers describe the same interest math at different points in the year.
A loan disclosure and a savings disclosure can both start from a periodic rate. They do not print the same yearly figure, because one folds in fees and the other folds in compounding. The mechanics below are the U.S. disclosure rules, as of October 2026.
What is APR in plain terms?
APR is a yearly percentage rate. On a credit card, the Consumer Financial Protection Bureau describes the daily periodic rate as the APR divided by 365, or by 360 at some issuers.
An 18% APR divided by 365 is about 0.0493% per day. On a $1,000 balance, 30 days at that rate is about $14.79 before the next compounding step. That product is interest for the period. It is not yet an APY.
On a closed-end mortgage, the same bureau says the APR includes the interest rate plus points, mortgage broker fees, and other charges paid to get the loan. The note rate and the APR can differ on the same loan. The note rate is the rate used to compute the monthly payment. The APR spreads certain upfront charges across the scheduled life of the loan.
The APR is a disclosure figure. It is not the amount of interest posted on a single statement. The Consumer Financial Protection Bureau describes that daily rate as the APR divided by 365, or by 360 at some issuers. On an 18% APR and a 365-day year, the rate is about 0.0493%. A $1,000 balance held each day of a 30-day cycle, before that interest is added back, comes to about $14.79.
Why do loans quote APR instead of the periodic rate?
A periodic rate is hard to compare across products that bill on different cycles. A yearly figure puts a daily card rate and a monthly installment rate on one scale. For a closed-end mortgage, the Consumer Financial Protection Bureau states that the APR reflects the interest rate plus points, mortgage broker fees, and other charges paid to get the loan. The interest rate alone leaves those charges out. The APR on the Loan Estimate is usually higher than the interest rate.
Regulation Z requires the APR on covered consumer credit disclosures so the finance charge and the amount financed can be expressed as a yearly rate. The mortgage APR exists for the same comparison job. Two loans with the same note rate can show different APRs when one charges more points.
The quoted APR does not add the cost of a late fee, a returned-payment fee, or a rate that starts only after a default. Those charges sit outside the APR unless the disclosure rule names them.
A quoted APR lets two offers be lined up. It does not predict the dollar interest on a balance that changes every day.
How APR and APY are calculated in practice
APY starts from the periodic rate and compounds it for a year. Regulation DD’s appendix gives the formula. A 5.00% nominal rate compounded monthly is about 5.12% APY, because (1 + 0.05 / 12) ^ 12 - 1 is about 0.05116.
If a savings account has a 5.00% interest rate that compounds monthly, the APY is about 5.12% as of October 2026. Regulation DD measures that yield by assuming the interest stays on deposit for a 365-day year. Each month’s interest is added to the balance, and the next month’s interest is calculated on that larger amount.
The same nominal rate compounded daily is slightly higher than the monthly figure. The gap is the interest-on-interest inside the year. A savings account that posts interest once a year has an APY equal to the nominal rate. A card that posts interest every day does not.
Credit-card interest uses the daily periodic rate on the balance the issuer’s method defines. Some methods use the average daily balance. Some exclude new purchases if the prior statement was paid in full. The interest calculation article separates those balance methods from the rate itself.
A worked case: $1,000 at 18% APR, daily periodic rate about 0.0493%, held 30 days, is about $14.79 of interest if the balance does not change and no payment posts. A second month that starts with $1,014.79 is larger, because the first month’s interest is now part of the balance. That second step is compounding. The APR line on the statement did not change.
The APY is the compounded yearly result. The APR is the uncompounded yearly rate, plus the finance charges the specific disclosure includes.
- Daily Compounding: Provides the highest APY for a given interest rate.
- Monthly Compounding: Interest is added once a month, so the APY is lower than daily compounding at the same interest rate.
- Quarterly/Annual Compounding: Results in a lower APY.
For the borrower, compounding frequency isn’t always a benefit. When a card issuer adds each day’s interest to the balance, the Consumer Financial Protection Bureau states that interest compounds daily. A balance carried overnight is then charged interest on that new interest.
What APR is not
APR is not APY. APR does not, by itself, tell a depositor how much a savings balance will be after a year of compounding. APY does not, by itself, tell a borrower which mortgage fees were included.
APR is not the interest rate on every consumer product. A deposit account discloses an APY under Regulation DD. A credit card discloses an APR. A mortgage can disclose both a note rate and an APR.
APR is not a promise that the rate stays fixed. A variable APR moves when the index named in the contract moves. The prime rate is a common index. The margin added to that index is set in the card agreement.
A single APR also does not describe a promotional rate and the rate that follows it. Those are two rates with two time windows.
What the two rates change for a balance
On a deposit, the APY is the figure that already includes the compounding frequency the bank uses. Comparing two savings offers by nominal rate alone drops that frequency.
On a loan, the APR is the figure that already includes the finance charges the rule requires. Comparing two mortgages by note rate alone drops points and certain broker fees.
On a credit card, interest in dollars depends on the daily periodic rate, the balance method, and how many days the balance sits unpaid. A lower APR produces less interest per day on the same balance. The dollar result still depends on the balance method described in credit cards.
The rate on the disclosure is the comparison tool. The interest on the statement is the balance times the periodic rate times the days in the cycle.
Tradeoffs, risks, or limitations
The APR assumes a schedule. A mortgage APR assumes the loan runs to the end of the term. Paying the loan off early changes the yearly cost of the upfront fees, and the disclosed APR does not recalculate itself.
A card APR ignores the grace period. A balance paid in full under the grace rules can generate no interest even though the APR is not zero. A balance that loses the grace period can accrue interest from the purchase date.
Compounding frequency is an input, not a separate product. Two accounts with the same APY have already absorbed different nominal rates and different frequencies into one yearly number. Two accounts with the same APR have not.
The formulas above use the public disclosure rules. An issuer can still use a 360-day or 365-day year, and the agreement states which one applies.
