APY vs interest rate: what's the difference?
The interest rate is the base rate a bank pays before compounding; APY is what you actually earn over a year after compounding is applied. APY is always equal to or greater than the interest rate. Compare deposit accounts by APY, never by the interest rate alone.
These two numbers look interchangeable in ads, but they are not the same — and the gap is real money.
| Interest rate | APY | |
|---|---|---|
| What it measures | Base rate paid on your balance | Total yearly return with compounding |
| Includes compounding? | No | Yes |
| Which is higher? | Lower or equal | Always ≥ the interest rate |
| Use it to… | Understand the base rate | Compare accounts fairly |
A concrete example
$10,000 at a 5.00% interest rate compounded monthly earns about $512 in a year — an APY of 5.12% — versus $500 with no compounding. The extra $12 comes purely from compounding, and it grows with your balance and the rate.
The rule
When a bank or credit union advertises a deposit account, compare the APY. When it advertises a loan, compare the APR. For deposits, a higher APY always beats a higher interest rate. Browse the highest CD APYs in Kansas City or savings APYs, and note that credit unions may quote a dividend rate instead of an interest rate.