Compound Interest Guide
APY vs Interest Rate: What Is the Difference?
Understand the difference between a stated interest rate and annual percentage yield when comparing savings products.
In this guide
Interest rate is the stated rate APY includes compounding Why it matters for calculatorsInterest rate is the stated rate
The interest rate is the percentage a product says it pays or charges over a year. It is often the first number people notice when comparing accounts.
However, the stated rate may not fully show the effect of compounding.
APY includes compounding
APY, or annual percentage yield, reflects the effect of compounding over one year. If interest is compounded monthly or daily, APY can be slightly higher than the stated rate.
This makes APY helpful when comparing savings accounts with different compounding schedules.
Why it matters for calculators
If you enter an APY into a calculator that also asks for compounding frequency, the result may not match the product exactly because APY already includes compounding. If possible, check whether the rate you are using is a stated interest rate or an APY.
For general planning, the difference may be small, but precision matters when comparing real financial products.