Effective Interest Rate Calculator
APR to APY (Effective Rate)
APY to APR (Nominal Rate)
Formula
APY = (1 + APR/n)^n - 1
APR = n x [(1 + APY)^(1/n) - 1]
where n = compounding periods per year
Frequently Asked Questions
What is the difference between APR and APY?
APR (Annual Percentage Rate) is the stated nominal rate without considering compounding. APY (Annual Percentage Yield) is the effective rate that accounts for compounding. APY is always higher than or equal to APR. Lenders typically advertise APR (lower number), while savings accounts advertise APY (higher number).
How does compounding frequency affect the effective rate?
More frequent compounding increases the effective rate. Daily compounding yields more than monthly, which yields more than quarterly, and so on. The difference is more significant at higher interest rates.
Why is the effective rate important?
The effective rate tells you the true cost of borrowing or the true return on savings. Two loans with the same APR but different compounding frequencies will have different actual costs. Always compare effective rates for accurate comparisons.
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