APR vs APY (and AER): Why the Same Rate Can Mean Different Things

Two savings accounts are advertised side by side. Bank A offers 4.90% with interest added daily. Bank B offers 5.00% with interest paid once a year. Which one pays more?

Bank A does. Put $10,000 in each for a year and Bank A pays $502.17 while Bank B pays $500.00. The lower headline rate wins because of how often the interest is added. That's the whole reason APY and AER exist: they turn rates quoted on different schedules into one comparable number.

Loans have their own version of the problem, with fees as well as compounding, and the rules differ between countries. This guide decodes the main terms, then works through savings, loans and credit cards with numbers you can check in the Compound Interest Calculator.

The decoder

Here is what each term measures, in plain language.

Nominal rate (or interest rate). The rate before any compounding or fees are taken into account. It's the starting point for every other figure.

APY: annual percentage yield (US savings). What a savings account actually earns in a year, including compounding. US Regulation DD sets the formula: APY = 100 × [(1 + interest ÷ principal)^{365 ÷ days in term} − 1].

AER: annual equivalent rate (UK savings). The same idea under a different name. NS&I, the UK government's savings bank, describes AER as what the annual rate of interest would be if the interest was compounded each time it was paid.

APR: annual percentage rate (loans and cards). A broader measure of the cost of borrowing than the interest rate. The US Consumer Financial Protection Bureau explains that for a mortgage it includes the interest rate plus points, broker fees and other charges, which is why it's usually higher than the interest rate.

Comparison rate (Australia). Moneysmart, run by Australia's financial regulator, describes it as a rate that includes the interest rate and most fees and charges relating to a loan, reduced to a single percentage figure.

Savings: one rate, five compounding schedules

The more often interest is added, the more interest you earn on earlier interest. Here is a 5.00% nominal rate turned into its effective annual rate (the APY or AER) for each common schedule:

The formula behind the table is (1 + rate ÷ n)ⁿ − 1, where n is the number of times interest is added in a year. For monthly: (1 + 0.05 ÷ 12)¹² − 1 = 0.05116, or 5.116%.

Two things stand out. First, the differences are real but small at savings rates: daily compounding beats annual compounding by about $12.67 a year on $10,000 here. Second, once a bank quotes the APY or AER, compounding is already built in, so you can compare those figures directly and ignore how often interest is paid.

That's what happened with Bank A and Bank B: 4.90% added daily works out at an effective 5.022%, which beats Bank B's 5.000%.

Borrowing: the fee that changes the rate

For loans, fees matter more than compounding. Here's a walkthrough with a personal loan.

The loan: $10,000 over 3 years at 9% interest, with monthly payments. Our Loan Calculator gives a payment of $318.00 a month, so you repay $11,448 in total and the interest comes to $1,448.

Now add a $300 set-up fee, paid at the start. You still repay $318.00 a month, but you've effectively received only $9,700 for those payments. Your total cost of borrowing is $1,448 + $300 = $1,748.

The APR answers the question: what interest rate on $9,700 would produce payments of $318.00 a month for 36 months? The answer is a monthly rate of about 0.9245%. To check it, put $9,700 at that rate into a standard loan payment formula over 36 months, and you get $318.00 again.

The interest rate is still 9%. But the APR, which counts the fee, is a little over 11%, and that's the figure to use when you compare this loan with one that has no fee.

Same loan, two different APRs: US vs UK

Here's a detail most comparisons miss: the US and UK don't calculate APR the same way.

• United States: Regulation Z's general rule finds the rate for one period (here, one month) and multiplies it by the number of periods in a year. That's a nominal rate, with no compounding.
• United Kingdom: the FCA's rules (CONC App 1.1) find the rate that makes the money you borrow equal to the payments you make, with each payment discounted over its time in years. That's an effective, compounded annual rate. It's then rounded to one decimal place.

On the same $10,000 loan with the $300 fee, the monthly rate is 0.9245%:

• US-style APR: 0.9245% × 12 = 11.09%.
• UK-style APR: (1.009245)¹² − 1 = 11.7%.

Even with no fee, a 9% loan with monthly payments works out at 9.00% the US way and 9.4% the UK way. So a UK APR and a US APR for identical loans are not directly comparable. Within one country, lenders use the same legal method, so comparing APRs from different lenders there still works.

Credit cards: the APR understates a year of interest

A card's APR is a yearly figure, but interest is charged in smaller steps through the year. If you carry a balance, each step's interest is added to what you owe and then earns interest itself, so a year's interest comes to more than the APR suggests. How often your card charges interest is set out in your card agreement.

Take a card at 19.99% APR, with interest charged monthly at 19.99% ÷ 12, and a $1,000 balance left untouched for a year. It grows to about $1,219.27, an effective yearly rate of 21.93%. At 24.99% APR, the effective rate is 28.06%.

The practical point isn't the exact figure; it's that card interest builds on itself. Our guide to debt avalanche vs snowball shows how to plan paying several cards off.

Australia: why the comparison rate comes with an example

Australia's comparison rate folds most fees into one figure, like an APR. Because a fixed fee weighs more heavily on a small or short loan, any rate that folds fees in depends on the loan amount and term it was worked out for. Before comparing two comparison rates, check that they're based on the same loan amount and term.

Before you compare two offers

1. Savings: compare APY or AER, not the headline rate. They already include compounding.
2. Loans: compare APRs (or comparison rates in Australia), not interest rates, because fees can change the ranking.
3. Across countries: don't compare a US APR with a UK APR directly. Work out the effective rate first.
4. Check the basis: a comparison rate or advertised APR is only accurate for the example it was calculated on.

For deposits with a fixed term, the Fixed Deposit Calculator shows the effective rate for each compounding option, and the Savings Goal Calculator works out how much to save each month for a target.

Last reviewed: 11 October 2026. Definitions and APR methods were checked against the official sources listed on that date. The rates, loans and accounts in this guide are examples, not offers. This is general information, not financial advice.