APY vs Interest Rate
Oct 06, 2023 By Susan Kelly

When comparing different savings and investment accounts, understanding the differences between an APY and an interest rate can significantly affect your potential earnings. By understanding the differences, you can find more efficient ways to save money or make smart investment decisions with financial products that offer better returns on your hard-earned cash.

In this blog post, we will provide an overview of what APY vs. Interest Rate means so that you can make informed decisions regarding managing your finances.

APY vs. Interest Rate: What’s the Difference

APY, or annual percentage yield, is a measure of the total return on your investment over some time. It includes the interest earned and any other fees associated with your account. APY considers compounding an important metric to consider when evaluating different financial products.

Conversely, the interest rate is simply the amount you are paid out by the lender for using their money. Interest rates vary widely based on factors such as creditworthiness and length of the loan term. Generally speaking, the higher your credit score, the better your chance of getting lower interest rates.

When comparing different savings accounts or investment options, looking at both APY and interest rates can help you find the product that will yield the most lucrative return on your money. Generally speaking, higher APYs are more beneficial than higher interest rates as they take into consideration compounding.

Which One is Important to Know for Savings Accounts

When considering savings accounts, it is important to understand the differences between APY and interest rates. While they are both measures of return on your investment, APY considers compounding interest while interest rate does not. This makes APY a better indicator of potential returns as it will provide the true measure of earnings from any given financial product.

APY is especially useful when comparing different savings accounts because it factors in the effect of compound interest over time. The higher the APY for a particular savings account, the greater its potential to earn more money over time courtesy of compound interest. For example, if you invest $1000 in a savings account with an APY of 2%, that same amount would be worth $1020 after 12 months. By contrast, a savings account with an APY of 3% would yield $1030 in the same period.

Examples of the Difference Between APY and Interest Rate

1. A savings account with an APY of 2% would yield $1020 after 12 months, while a savings account with an interest rate of 2% would yield only $1000.

2. An investment product with an APY of 3% would produce higher returns than one with a corresponding % interest rate of 3%.

3. A certificate of deposit (CD) with a 5-year term and an APY of 1.5% would generate more earnings than a CD with the same length and an interest rate of 1.5%.

4. Money market accounts have higher APYs than regular savings accounts because they are designed to help customers reach their short-term financial goals faster.

5. Index funds have lower APYs than mutual funds because the former invest in a basket of stocks while the latter actively manage investments.

6. Interest-bearing checking accounts generally offer higher APYs than traditional checking accounts as they are designed to generate more interest income for customers.

7. Money market savings accounts typically offer higher APYs than regular ones because they require higher minimum deposits and provide access to multiple investment options.

8. Bonds have lower APYs than stocks as bonds are considered a less risky type of investment and, thus, offer lower returns over time.

9. Exchange-traded funds (ETFs) usually have higher APYs than individual stocks since ETFs are diversified investments and carry less risk than individual stocks.

10. International bonds typically have lower APYs than domestic bonds because they are subject to currency fluctuations that can affect returns over time.

APY to the Interest Rate Calculator

An APY to interest rate calculator is a tool that helps users compare different savings and investment accounts by calculating how much money they can expect to earn from them. The calculator considers factors such as the length of time, amount invested, type of account, compounding frequency, and other fees associated with the product to estimate the total return an investor might receive.

Using an APY to calculate interest rates, you need to provide information about your financial goals and objectives. You will also need to enter details about any deposit amounts or withdrawal plans you have in place. Once this data has been entered into the calculator, it will generate an estimated total return based on all factors. This includes any interest earned, compounded gains, and other fees associated with the product.

An APY to interest rate calculator is useful for investing or saving money regularly. It helps you compare savings accounts and investment products to decide which will offer the most lucrative return on your money. Furthermore, it can also help users determine if they’re earning enough from their current financial products to meet their long-term goals. With this knowledge, they can then adjust accordingly and maximize their earnings potential over time.

Pros and Cons APY and Interest Rate


  • Easily compare different financial products.
  • Estimate the total return of a savings or investment account.
  • Consider compounding and other fees when calculating returns.
  • Determine if current accounts are providing enough earnings to meet long-term goals.
  • Maximize earnings potential over time.


  • Not all financial products have an APY associated with them.
  • May not consider all fees or taxes associated with a product.
  • It is limited to the information entered and may not accurately estimate returns.


Q: How do I determine my APY and Interest Rate?

A: Your bank or provider should provide this information up front, whether you are opening a new account or inquiring about an existing one. It is important to double-check the details and ensure you fully understand their meaning to make an informed decision about your financial product. Additionally, compare APYs and interest rates offered by different providers to ensure you get the most bang for your buck.

Q: How do APYs and Interest Rates impact my savings?

A: The higher the APY or Interest Rate on a savings account, the more money you will earn. However, it's important to recognize that compounding interest also affects how much money you can earn from your deposit. For example, a high-yield savings account with an APY of 2.5% will earn more than a standard savings account with an interest rate of 1%.

Q: Should I prioritize APY or Interest Rate when deciding where to invest my money?

A: Ultimately, the decision depends on your individual goals and preferences, but it is generally advisable to prioritize finding the highest APY rather than just focusing on the interest rate. An investment or savings product that offers a higher APY may mean that you can make more money from your deposit over time, even if it has slightly lower interest rates. It is also important to consider any additional fees associated with the account before deciding.


When comparing different savings or investment products, APY and interest rate are key. Understanding their differences can help you decide where to place your money for the most lucrative return. With some research, you can use an APY to interest rate calculator to estimate how much money you could earn from different accounts over time and ensure that your finances are working hard for you.