Annual Percentage Yield (APY)

Full definition

APY (Annual Percentage Yield) is the annualized rate of return on a deposit account, factoring in the effect of compounding interest. It is distinct from APR (Annual Percentage Rate), which measures the annualized cost of borrowing. APY formula: APY = (1 + periodic rate)^n - 1, where n is the number of compounding periods per year. Example: A savings account with a 5.00% nominal annual rate compounded monthly has an APY of (1 + 0.05/12)^12 - 1 = 5.116%. The 0.116% difference represents the benefit of monthly compounding. APR vs. APY - the critical consumer distinction: APR (loan cost): Defined by TILA. Represents the annualized cost of credit including interest and certain fees. Does NOT account for compounding of interest (this understates the true cost of compound-interest loans). APY (savings return): Defined by the Truth in Savings Act. Represents the annualized return on deposits including compounding. Gives a more accurate picture of savings growth. Why this matters to personal loan borrowers: If you are building an emergency fund while repaying a personal loan, the APY on your savings account and the APR on your personal loan determine whether you should prioritize debt repayment over savings accumulation. General rule: if your loan APR exceeds your savings APY (nearly always true), every dollar of emergency fund above your minimum buffer is mathematically better deployed reducing loan principal. Where to find competitive APYs: High-yield savings accounts at online banks (Ally, Marcus, SoFi) typically offer APYs of 4%-5% in 2026, far above national average savings rates of 0.4%-0.6% at traditional banks.

• Simple Interest