Overview
- An interest rate is the base rate a bank pays, stated without accounting for compounding.
- An annual percentage yield (APY) builds compounding into the number, so it reflects what a deposit actually earns in one year.
- The more frequently interest compounds—daily versus monthly versus annually—the larger the gap between the interest rate and the APY.
- An annual percentage rate (APR) is the borrowing-side equivalent of an interest rate and is often confused with APY, even though the two describe different sides of a financial product.
- When comparing savings accounts, money market accounts or certificates of deposit (CDs), APY is the figure that lets you compare offers on equal footing.
Two accounts can advertise the same interest rate and still pay you different amounts of money in a year. The reason is compounding, and it is exactly what separates an interest rate from an APY. The interest rate is the base rate your bank pays before compounding is factored in, while the APY reflects what you actually earn over a year once compounding is included. When you're comparing savings accounts, the APY, not the interest rate, is the number that reflects your annual yield.
What is an interest rate on a saving account?
The interest rate is the percentage a bank pays on your deposit before compounding is applied. It is the raw rate. Banks are required to disclose this rate, but on its own, it understates what you'll actually earn if interest compounds more than once a year.
Think of the interest rate as the starting point of the calculation, not the finish line. A savings account paying a 3.90% interest rate compounded daily will produce an annual yield higher than that 3.90% because each day’s interest starts earning interest of its own. That difference is what APY is built to capture.
What is APY?
APY is the total interest a deposit account earns in one year, including the effect of compound interest. Because it accounts for compounding, APY is always equal to or higher than the stated interest rate on the same account.
Here's a simplified illustration with hypothetical figures: a deposit earning a 3.90% interest rate compounded daily produces an APY of roughly 3.98%. On a $10,000 balance held for a full year, that gap between interest rate and APY translates to a few extra dollars of interest; money you earn simply because of how often the bank compounds, not because you did anything differently.
APY vs. interest rate: What's actually different?
The two numbers describe the same account, but they answer different questions. The interest rate tells you the base rate before compounding; the APY tells you the total interest earned over a year, including compounding. The table below lays out the distinction.
| Attribute | Interest rate | APY |
|---|---|---|
| What it measures | Base rate, before compounding | Total yield, including compounding |
| Includes compounding | No | Yes |
| Useful for | Understanding how interest earnings are calculated | Understanding your total potential interest earned over a year, including compounding |
| Which is higher | Equal to or lower than APY | Equal to or higher than interest rate |
Because APY already factors in compounding frequency, it's the more reliable figure for comparing a high-yield savings account, a money market account, and a CD side by side, even when each compounds on a different schedule.
APY vs. APR: How do these compare?
Why compounding frequency changes what you earn
Daily compounding produces a higher effective yield than monthly or quarterly compounding at the same stated interest rate, because interest starts earning interest sooner. Compounding frequency is one factor that affects the difference between an interest rate and APY. With a fixed-rate CD, the interest rate remains the same for the term, so understanding how that rate compounds into an APY can help you evaluate potential earnings.
The EverBank Performance® CD locks in a fixed rate for terms from 3 months to 5 years, which means the APY quoted at account opening is the APY you'll earn for that full term, assuming interest remains on deposit until maturity. For accounts with variable rates, like a high-yield savings account, the APY can change with time, so it's worth checking periodically rather than assuming it holds steady.
How to compare savings accounts using APY
When you're rate-shopping, line up the APYs, not the interest rates, across every account you're considering. Also check whether that APY applies to your full balance or only up to a certain tier, whether a monthly maintenance fee could offset the yield, and whether the rate can change on variable accounts. A high APY paired with a monthly fee or a high minimum balance requirement may return less than a slightly lower APY with no fee at all.
It's also worth checking how a given APY stacks up against the broader market. The EverBank Performance® Savings account, for instance, provides a competitive yield above the FDIC national average for savings deposits, with no monthly maintenance fee and no minimum balance requirement.
In conclusion
The interest rate and the APY on a savings account describe the same product, but APY reflects the effect of compounding. Comparing accounts on interest rate alone can understate the differences in potential earnings between accounts; APY provides a more consistent basis for comparison.
Frequently asked questions
Is APY the same as interest rate?
No. The interest rate is the base rate before compounding, while APY is the total yield after compounding is factored in. On the same account, APY will always be equal to or higher than the interest rate, and the gap grows with more frequent compounding.
Why is my APY higher than my interest rate?
Because APY accounts for the effect of compounding. Each time interest compounds, it starts earning its own interest, which pushes the effective annual yield above the stated base rate.
Is APY or APR better for savings account?
APY is the relevant figure for savings accounts, CDs, and money market accounts; it tells you what you'll earn. APR measures the cost of borrowing products like loans and credit cards and isn't used to describe what a deposit account pays.
Does a higher APY always mean I'll earn more?
Not necessarily. A higher APY can be offset by a monthly maintenance fee, a minimum balance requirement to earn the top rate, or a rate that only applies to part of your balance. Compare the full terms, not just the headline APY.
Does APY change over time?
On variable-rate accounts, yes, the APY can change over time. On a fixed-rate CD, the APY quoted at opening holds for the full term, assuming interest remains on deposit until maturity.
Related terms
- Annual percentage yield (APY): The total amount of interest earned on a deposit account in one year, expressed as a percentage and accounting for compound interest.
- Interest rate: The base rate a bank pays on a deposit, before the effect of compounding is applied.
- Annual percentage rate (APR): A measure of the yearly cost of borrowing on a loan or credit product, distinct from APY, which applies to deposits.
- Compound interest: Interest calculated on both the initial principal and previously accumulated interest, which increases total earnings the longer funds remain on deposit.
- Variable rate: An interest rate that can change over time.
- Certificate of deposit (CD): A deposit account that holds funds for a set term, typically in exchange for a fixed interest rate, with penalties that may apply for early withdrawals.
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