When comparing savings accounts, you may see two numbers: the account’s interest rate and the APY. These numbers might be the same, but more often, the APY is slightly higher, and that’s because of compounding interest.
A savings account interest rate is how much you can expect your balance to grow — the higher the number, the more interest you earn. APY stands for Annual Percentage Yield.
In short, the difference between the interest rate and APY is that the APY includes the impact of compounding. This means it factors in how often interest is calculated and added to the balance, whether daily, monthly, quarterly or yearly.
APY provides a more accurate representation of the amount you’ll earn on your balance over one year.
Since APY factors in compounding, it is typically a little higher than the raw interest rate. For example, a savings account with a 4.88% interest rate that compounds monthly has an APY of 5%.
Quick explanation: Compound interest means earning interest on your interest.
Long explanation: Compound interest means the interest you’ve earned on your deposit is added to your balance, and then that combined new total continues to earn additional interest. This “interest on interest” creates a positive snowballing effect that accelerates growth.
For example, $1,000 in a 5% yearly compounding account earns $50 after 12 months. But in a daily compounding account, the earnings would total $51.27.
Ideally, you want a savings account that compounds interest daily. Daily compounding is a faster way to grow your savings than yearly or monthly compounding, because your earned interest is added to your account every day.
The average interest rate on a savings account is 0.38%. If you want something with more oomph, look to high-yield savings accounts, or HYSAs.(1)
HYSAs are often found with online banks, such as SoFi®, Varo or Marcus by Goldman Sachs. Online banks often offer higher rates than traditional banks due to their lower operational costs, as they don’t maintain physical branches.
APR is for lending, and it stands for Annual Percentage Rate. It represents the yearly cost of borrowing, expressed as a percentage.
Just like with APY for savings, APR gives a more accurate picture of how much you’ll owe compared to the raw interest rate alone. In most cases, the APR is higher than the interest rate, since it factors in additional costs such as origination or application fees.
When comparing loans or credit cards, it’s essential to review both the interest rate and the APR for a clearer understanding of the total borrowing cost.
Just remember: APY is for savings, and APR is for borrowing.
Narrow down top savings accounts by APY, monthly fees and deposit requirements. For a better comparison, tick the Compare box on multiple options to compare accounts side by side.
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How we picked theseThe Finder Score crunches over 250 savings accounts from hundreds of financial institutions. It takes into account the product's interest rate, fees, opening deposit and features - this gives you a simple score out of 10.
To provide a Score, Finder’s banking experts analyze hundreds of savings accounts against FDIC-reported national averages as a baseline. Accounts with rates well over the national average are scored the highest, while accounts with rates well below are scored low.
When opening a savings account, certificate of deposit or money market account, the account’s APY is the number you really want to pay attention to. An account’s APY represents how much your balance will grow in 12 months.
To compare more options, check out our savings guides and comparisons.
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