APR on savings accounts is the yearly interest rate your bank pays you, shown as a percentage of your balance
APR stands for Annual Percentage Rate. On a savings account, it tells you how much interest the bank will pay you over one year on every dollar you keep in the account. If your account has a 4.5% APR and you hold $1,000 for a full year without touching it, you would earn $45 in interest (before any fees or tax).
The confusion happens because banks often advertise APY instead of APR on savings accounts. APY includes the effect of compounding—the way interest gets added to your balance, and then you earn interest on that interest. APR does not. For savings accounts, APY is almost always slightly higher than APR, and it is the number that matters for what you actually earn. But if you want to understand how the calculation works underneath, or if you are comparing accounts that quote APR, you need to know how to work backward from one to the other.
Key Takeaways
- APR is the base yearly interest rate; APY is APR adjusted for how often interest compounds, and APY is what you actually earn on a savings account.
- To calculate APR from APY, use the formula: APR = (APY + 1)^(1/n) − 1, where n is the number of times per year interest compounds.
- Most savings accounts compound daily, which means APY will be slightly higher than APR—usually 0.01% to 0.05% higher depending on the rate.
- You do not need to calculate APR yourself; your bank must disclose both APR and APY in the account terms, and you should compare the APY numbers when choosing between accounts.
The difference between APR and APY on savings accounts
APR is the raw interest rate. It assumes you earn interest once per year on your starting balance only. APY is APR adjusted for compounding—the way interest gets paid to your account multiple times per year, and each payment adds to your balance so the next payment is calculated on a larger number.
Here is a concrete example. Suppose you have $10,000 in an account with 4.8% APR that compounds daily (which is standard). With APR alone, you would earn $480 in the first year. But because interest compounds daily, you actually earn about $491.60. That $491.60 divided by $10,000 is 4.916%—your APY. The difference is small but real, and it grows larger the higher the interest rate is.
Banks are required by law to show you the APY in the account disclosure, usually called the Truth in Savings Act disclosure. That is the number you should use when deciding between accounts. APR is less commonly advertised for savings accounts because it understates what you will actually earn.
How to calculate APR from APY if you need to
If you have the APY and want to find the APR, use this formula:
APR = (APY + 1)^(1/n) − 1
In this formula, n is the number of times per year the bank compounds interest. For daily compounding, n = 365. For monthly compounding, n = 12. For quarterly, n = 4.
Let us work through an example. Suppose your account shows 4.916% APY and compounds daily. To find the APR:
- Add 1 to the APY: 4.916% + 1 = 1.04916
- Divide 1 by the number of compounding periods: 1 ÷ 365 = 0.00274
- Raise 1.04916 to the power of 0.00274: 1.04916^0.00274 = 1.00480
- Subtract 1: 1.00480 − 1 = 0.00480, or 4.80% APR
You will need a calculator with an exponent function (most phone calculators have one). The result should be slightly lower than the APY you started with.
Why banks use APY instead of APR for savings accounts
APY is the honest number because it shows what you actually earn. A bank that advertises only APR is technically not lying, but it is showing you a smaller number than what your money will grow to. Federal law requires banks to disclose APY prominently so you can compare accounts fairly.
This is different from credit cards and loans, where APR is the standard. On a credit card, you are usually charged interest monthly, and the compounding effect is built into how your balance grows. For savings, the compounding effect is so important to what you earn that the law requires it to be shown separately.
When you are shopping for a savings account, ignore any APR figure the bank shows and focus only on the APY. That is the rate that will determine how much money you actually have at the end of the year.
What affects APR and APY on your savings account
The APR your bank offers depends on the Federal Reserve's interest rate (called the federal funds rate), competition between banks, and the bank's own costs. When the Fed raises rates, banks raise the APR they pay on savings accounts. When the Fed cuts rates, banks cut APR. The lag between a Fed move and a bank's response can be weeks or months.
Your own APR may also depend on your account type. High-yield savings accounts typically offer higher APR than regular savings accounts at the same bank. Money market accounts sometimes offer different rates. Some banks offer promotional rates for new customers that expire after a set period.
APY is always slightly higher than APR on the same account because of compounding. The more often interest compounds, the larger the gap. Daily compounding (the most common) creates a gap of roughly 0.01% to 0.05% depending on the APR level. Monthly compounding creates a smaller gap. Annual compounding (rare on savings accounts) would mean APY and APR are the same.
How to find your account's APR and APY
Your bank must provide this information in writing. Look for the Truth in Savings Act disclosure, which is usually a document titled "Account Terms and Conditions" or "Deposit Account Agreement." It lists the APY prominently, and often the APR as well. You can request this document from your bank's website, by phone, or in person.
If you are comparing accounts before opening one, ask the bank for the disclosure or look for the APY on the account details page of the bank's website. The APY should be clearly labeled and may include a note about when it was last updated. Interest rates change frequently, so a rate quoted last month may not be current.
Your monthly statement does not usually show APR or APY. It shows the interest you earned that month, which is calculated by the bank using the APY. If you want to verify the calculation, divide the interest earned by your average balance for the month, then multiply by 12 to annualize it—but this will only approximate the APY because of compounding.
Frequently Asked Questions
Is APR or APY better for a savings account?
APY is better because it shows what you actually earn. APR understates your earnings by ignoring compounding. When comparing two savings accounts, always use the APY numbers, not APR.
Why is my APY higher than the APR the bank quoted?
Because APY includes the effect of compounding—interest being paid multiple times per year and added to your balance. The more often interest compounds, the higher APY will be relative to APR. This is normal and expected.
Can I calculate how much interest I will earn using APR?
You can get a rough estimate, but it will be slightly low. Multiply your balance by the APR to get the annual interest if it compounded once. To be accurate, use APY instead, or use the compounding formula with the APR and the number of compounding periods per year.
Do all savings accounts compound daily?
Most do, but not all. Check your account disclosure to see the compounding frequency. Daily compounding is standard at online banks and most large banks. Some accounts compound monthly or quarterly, which results in slightly lower APY for the same APR.
What happens to my APR if interest rates change?
It depends on your account type. Most savings accounts have variable APR, meaning the bank can change it whenever rates in the market change. Some promotional accounts lock in a rate for a set period. Check your disclosure to see whether your rate is variable or fixed.