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APY vs. Interest Rate: What’s the Difference?
The terms are sometimes used interchangeably, but APY and interest rate are different thanks to compound interest.
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When dealing with interest-bearing bank accounts, it’s important to understand the difference between annual percentage yield (APY) and interest rate. The two are similar, but they’re not exactly the same. Knowing the distinction between the two terms will help you know how much return to expect on your deposits and investments.
Here’s what you need to know about APY vs. interest rate.
APY reflects the total amount of interest you earn on money in an account over one year, while an interest rate is the rate at which interest is earned on the original amount. Both are expressed as percentages.
The key difference between APY and interest rate is compound interest.APY includes interest that’s earned on the original balance as well as the amount of compound interest earned in one year. Interest rate only accounts for interest earned on the original amount.
Annual Percentage Yield (APY) is accurate as of June 17th, 2025. Start earning 2.50% APY, then qualify to earn 5.00% APY on your balance up to $5,000.00 and 2.50% APY on balances over $5,000 next month by 1) Receiving direct deposit(s) totaling $1,000 or more; and 2) Ending the month with a positive balance in all your Varo Accounts. No fees, no minimums required. Rates subject to change at any time.
This offer is only valid for a new Premium Savings Account (“PSA”). The Promotional Annual Percentage Yield (“Promotional APY”) will be automatically applied to the account, and will remain effective for 180 days (the “Promotion Period”), after which it will automatically revert to the Standard Annual Percentage Yield (“Standard APY”) without requiring any action from you. Accounts must be opened by 9/30/26 to qualify for the Promotional APY. No minimum balance required, and the offer may be withdrawn at any time. Excludes non-U.S. residents, and residents of any jurisdiction where this offer is not valid. Other restrictions may apply. Please visit etrade.com/premiumsavings for more information.
These cash accounts combine services and features similar to checking, savings and/or investment accounts in one product. Cash management accounts are typically offered by non-bank financial institutions.
The Base Annual Percentage Yield (APY) is 3.30% (from program banks) as of 1/30/26 and is subject to change. Eligible new clients can get a 0.75% APY boost over the base APY for 3 months on up to a $150k balance. The Direct Deposit Plus Investing Program from Wealthfront Advisers LLC and Wealthfront Brokerage LLC provides eligible clients a 0.25% APY increase above the base APY on eligible Cash Account balances. Wealthfront may change or end the program at any time and determine eligibility at its discretion. Terms apply. Full details at wealthfront.com/promo-terms. Cash Account offered by Wealthfront Brokerage LLC, Member FINRA/SIPC, and is not a bank. Base APY is representative, variable, and requires no minimum. Individual experiences and outcomes will differ. NerdWallet receives compensation from Wealthfront for referring clients through paid ads, which creates a conflict of interest; NerdWallet is not a client. Investing involves risks. Securities are not bank deposits, bank-guaranteed or FDIC-insured, and may lose value. Investment management and advisory services provided by Wealthfront Advisers LLC, an SEC-registered investment adviser.
Annual percentage yield (variable) is 3.25% as of 12/12/25, plus a 0.75% boost (“APY Boost”) on balances up to $1M for new clients with a qualifying deposit. $10 min deposit for base APY. Terms apply (betterment.com/boost); if the base APY changes, the Boosted APY will change. Cash Reserve offered by Betterment LLC and requires a Betterment Securities brokerage account. Betterment is not a bank. Learn More (https://www.betterment.com/cash-portfolio).
CDs (certificates of deposit) are a type of savings account with a fixed rate and term, and usually have higher interest rates than regular savings accounts.
As of 05/19/2026, the Annual Percentage Yield (APY) of the Certificates of Deposit is up to 4.05%. Your interest rate and APY may change at any time until funding is settled, and penalties may reduce earnings. Settlement date is when funds are received and posted to your account according to our Funds Availability policy, found in section 3 of the Morgan Stanley Private Bank Deposit Account Agreement. The APY is based on no withdrawal of credited interest and no redemption prior to the stated maturity date. Please visit etrade.com/ratesheet for information regarding the current interest rate, corresponding APY, and account terms.
Annual Percentage Yield (APY) is subject to change at any time without notice. Offer applies to personal non-IRA accounts only. Fees may reduce earnings. For CD accounts, a penalty may be imposed for early withdrawals. After maturity, if your CD rolls over, you will earn the offered rate of interest in effect at that time. Visit synchrony.com/banking for current rates, terms and account requirements. Member FDIC.
All Bread Savings APYs are accurate as of 05/21/2026. APYs are subject to change at any time without notice. Offers apply to personal accounts only. Fees may reduce earnings. To open a CD, a minimum of $1,500 is required and must be deposited in a single transaction. A penalty will be imposed for early withdrawals on CDs. At maturity, your CD will automatically renew and earn the base interest rate in effect at that time. Rates are compared against competitor rates published by NerdWallet.com and the institutions themselves as of 05/21/2026. NerdWallet.com obtains the data from the various banks that it tracks and its accuracy cannot be guaranteed.
Annual Percentage Yield (APY). APY may change at any time and fees may reduce earnings. Please visit etrade.com/ratesheet for more information. The $15 monthly account fee can be waived when you maintain an average monthly balance of at least $5,000 in the account on or after the end of the second calendar month from opening the account.
Interest rate vs. APY: Which is important to know for savings accounts?
While financial institutions are required to show rates as APY, they can also show the corresponding interest rate. When it comes to your savings account, it’s more important to know the APY, because knowing the rate that includes compound frequency (that is, how often interest is paid) will give you more precise information about how much interest you will earn within the year.
Do high APYs still matter in low-rate environments?
Margarette Burnette
Banking Senior Writer
Yes. In fact, I’d say APYs may matter even more when rates are low, because they give you a chance to squeeze out a good yield even if there aren’t a lot of other good options around to earn interest. In my years writing about savings accounts, I’ve seen rates go up and down. I’ve found that accounts with the higher APYs always seem to outperform their competitors over time, no matter which direction rates go.
Yes. In fact, I’d say APYs may matter even more when rates are low, because they give you a chance to squeeze out a good yield even if there aren’t a lot of other good options around to earn interest. In my years writing about savings accounts, I’ve seen rates go up and down. I’ve found that accounts with the higher APYs always seem to outperform their competitors over time, no matter which direction rates go.
Margarette Burnette
Banking Senior Writer
Spencer Tierney
Banking Senior Writer
I know it's discouraging to see savings rates drop, but securing an APY that is high relative to other accounts is still a smart move. If you have at least a few thousand dollars in a savings account that are barely earning interest, you'll likely see a tangible benefit from getting a high-yield account. Our analysis has shown that high-yield savings accounts at online banks still have higher rates than traditional banks' savings accounts regardless of whether it's a low- or high-rate environment.
I know it's discouraging to see savings rates drop, but securing an APY that is high relative to other accounts is still a smart move. If you have at least a few thousand dollars in a savings account that are barely earning interest, you'll likely see a tangible benefit from getting a high-yield account. Our analysis has shown that high-yield savings accounts at online banks still have higher rates than traditional banks' savings accounts regardless of whether it's a low- or high-rate environment.
Spencer Tierney
Banking Senior Writer
Margarette Burnette
Banking Senior Writer
Yes. In fact, I’d say APYs may matter even more when rates are low, because they give you a chance to squeeze out a good yield even if there aren’t a lot of other good options around to earn interest. In my years writing about savings accounts, I’ve seen rates go up and down. I’ve found that accounts with the higher APYs always seem to outperform their competitors over time, no matter which direction rates go.
Yes. In fact, I’d say APYs may matter even more when rates are low, because they give you a chance to squeeze out a good yield even if there aren’t a lot of other good options around to earn interest. In my years writing about savings accounts, I’ve seen rates go up and down. I’ve found that accounts with the higher APYs always seem to outperform their competitors over time, no matter which direction rates go.
Margarette Burnette
Banking Senior Writer
Spencer Tierney
Banking Senior Writer
I know it's discouraging to see savings rates drop, but securing an APY that is high relative to other accounts is still a smart move. If you have at least a few thousand dollars in a savings account that are barely earning interest, you'll likely see a tangible benefit from getting a high-yield account. Our analysis has shown that high-yield savings accounts at online banks still have higher rates than traditional banks' savings accounts regardless of whether it's a low- or high-rate environment.
I know it's discouraging to see savings rates drop, but securing an APY that is high relative to other accounts is still a smart move. If you have at least a few thousand dollars in a savings account that are barely earning interest, you'll likely see a tangible benefit from getting a high-yield account. Our analysis has shown that high-yield savings accounts at online banks still have higher rates than traditional banks' savings accounts regardless of whether it's a low- or high-rate environment.
Spencer Tierney
Banking Senior Writer
Margarette Burnette
Banking Senior Writer
Yes. In fact, I’d say APYs may matter even more when rates are low, because they give you a chance to squeeze out a good yield even if there aren’t a lot of other good options around to earn interest. In my years writing about savings accounts, I’ve seen rates go up and down. I’ve found that accounts with the higher APYs always seem to outperform their competitors over time, no matter which direction rates go.
Yes. In fact, I’d say APYs may matter even more when rates are low, because they give you a chance to squeeze out a good yield even if there aren’t a lot of other good options around to earn interest. In my years writing about savings accounts, I’ve seen rates go up and down. I’ve found that accounts with the higher APYs always seem to outperform their competitors over time, no matter which direction rates go.
Margarette Burnette
Banking Senior Writer
Spencer Tierney
Banking Senior Writer
I know it's discouraging to see savings rates drop, but securing an APY that is high relative to other accounts is still a smart move. If you have at least a few thousand dollars in a savings account that are barely earning interest, you'll likely see a tangible benefit from getting a high-yield account. Our analysis has shown that high-yield savings accounts at online banks still have higher rates than traditional banks' savings accounts regardless of whether it's a low- or high-rate environment.
I know it's discouraging to see savings rates drop, but securing an APY that is high relative to other accounts is still a smart move. If you have at least a few thousand dollars in a savings account that are barely earning interest, you'll likely see a tangible benefit from getting a high-yield account. Our analysis has shown that high-yield savings accounts at online banks still have higher rates than traditional banks' savings accounts regardless of whether it's a low- or high-rate environment.
Spencer Tierney
Banking Senior Writer
Example of the difference between APY and interest rate
Here’s an example showing how APY is different from interest rate:
Suppose you have $10,000 and earn an interest rate of 4.00% at a bank, paid after one year, without compounding. The amount of interest you earn is $400 ($10,000 x 4.00% = $400).
Now, instead of waiting one year, suppose the bank deposits a proportional share of the interest earned after one month, which is 1/12 of one year. The bank would deposit 1/12 of $400, which is about $33.33. This means the total bank balance will be a little more than $10,000: $10,033.33.
After the next month, the bank deposits another proportional share of interest. If the interest rate is the same, and the balance remains the same, then the bank computes 4.00% of $10,033.33, which is about $401.33. The bank would deposit 1/12 of the $401.33, which is about $33.44.
The interest earned the previous month compounds, meaning that it also earns interest. At the end of the second month, your $10,033.33 balance earns $33.44 in interest, and the total bank balance will be about $10,066.77.
If the interest continues to compound each month at the same rate, then at the end of one year, the account would actually earn about $407.42, for an ending balance of $10,407.42. This means that with compounding, the APY would be about 4.0742% ($10,000 x 4.0742% = $407.42). You can use a savings calculator to calculate balance amounts and try other scenarios with daily, monthly and annual compounding. You can also use the APY calculator below to enter the APY and then compute the initial interest rate.
In this example, where interest is compounded monthly, the interest rate is a strong 4.00% and APY is a little more than 4.07%.
Use this calculator to convert an APY to an interest rate and see how the rates differ.
Frequently Asked Questions
What’s the difference between APY and interest rate? What’s the difference between APY and interest rate?
The difference between APY and interest rate is that APY includes compound interest, and interest rate doesn’t.
Why is APY higher than the interest rate? Why is APY higher than the interest rate?
APY is higher than the corresponding interest rate because APY includes interest on the original amount and compound interest. In contrast, the interest rate only features interest on the original amount, with no compounding interest.
