{"id":2415,"date":"2024-07-25T21:21:35","date_gmt":"2024-07-25T21:21:35","guid":{"rendered":"https:\/\/www.sprucemoney.com\/resource-center\/?p=2415"},"modified":"2025-03-29T02:34:35","modified_gmt":"2025-03-29T02:34:35","slug":"apy-vs-interest-rate","status":"publish","type":"post","link":"https:\/\/www.sprucemoney.com\/resource-center\/mobile-banking\/apy-vs-interest-rate\/","title":{"rendered":"APY vs. interest rate: What\u2019s the difference?"},"content":{"rendered":"\n<p>Diving into the nuances of financial jargon may not be tops on your to-do list, but if you\u2019re wanting to make smart money moves, brushing up on your banking vocab is a great first step. One example is understanding the difference between APY vs. interest rate. <\/p>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"alignright size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"240\" height=\"123\" src=\"https:\/\/www.sprucemoney.com\/resource-center\/wp-content\/uploads\/2024\/07\/apy-vs-interest-rate-thumbnail.png\" alt=\"APY vs interest rate graphic\" class=\"wp-image-2422\"\/><\/figure>\n<\/div>\n\n\n<p>Both words may have caught your eye in reference to earning money \u2014 but heads up! These terms are not interchangeable. In other words, Annual Percentage Yield (APY) is not the same as interest rate, although they are related.<\/p>\n\n\n\n<p>To help you understand the ins and outs of these terms, along with the difference between APY and interest rate, the Spruce team is here to help you level up your financial knowledge as you look for savings account options. Plus, we\u2019ll touch on concepts like APYE and APR in case, like many of us, those terms aren\u2019t a regular feature in your everyday language. Yes, it\u2019s a lot to take in, but don\u2019t worry \u2014we\u2019ve got your back with simple to digest explanations and examples.<\/p>\n\n\n\n<p><strong>Did you know with Spruce you can opt in to earn interest and take advantage of compounding interest today?&nbsp;<\/strong>With Spruce, you can benefit from daily compounding interest and earn 3.50% APY<sup><button data-disclaimer-trigger=\"12\" class=\"js-disclaimer-link\"><span class=\"reader\">Disclaimer number<\/span><span>12<\/span><span class=\"reader\">. Go to disclaimer for more details.<\/span><\/button><\/sup>&nbsp;on every penny in your Savings Account. In fact, Spruce offers you up to two interest-bearing saving goals and an Extra Saving account \u2014 all with no sign-up fees, minimum balance requirements or monthly fees!<\/p>\n\n\n\n<p>Check out our Help Center to find out&nbsp;<a href=\"https:\/\/www.sprucemoney.com\/resource-center\/help\/account-information\/interest-opt-in\/\">how to opt in to start earning interest<\/a>&nbsp;today. Learn more about&nbsp;<a href=\"https:\/\/www.sprucemoney.com\/savings-interest\/\">Spruce savings interest<\/a>.<\/p>\n\n\n\n<div class=\"wp-block-create-block-hrb-article-cta\" class=\"wp-block-create-block-hrb-article-cta\" style=\"background-color:#005d1f\"><div class=\"hrb-article-cta--image\" style=\"background-image:url(&quot;https:\/\/www.sprucemoney.com\/resource-center\/wp-content\/uploads\/2024\/06\/spruce-susan-resized.png&quot;);background-size:contain;background-position:center;background-repeat:no-repeat\"><\/div><div class=\"hrb-article-cta--copy #ffffff\"><h3 class=\"main-heading\">A mobile banking app you\u2019ll love, from a name you can trust. Check out Spruce, built by H&amp;R Block.<\/h3><div class=\"quick-links-list\">\n<div class=\"wp-block-button\"><a class=\"wp-block-button__link wp-element-button\" href=\"https:\/\/account.sprucemoney.com\/signup\/\">Get started<\/a><\/div>\n<\/div><\/div><\/div>\n\n\n\n<p class=\"is-style-diy-tiny-text\">Spruce fintech platform is built by H&amp;R Block, which is not a bank. Bank products by Pathward\u00ae, N.A., Member FDIC.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-what-is-apy-what-does-apy-mean\">What is APY? What does APY mean?<\/h2>\n\n\n\n<p>APY is a measure of how much you\u2019ve earned over a year, shown as a percentage. It applies when you put money in a savings account, money market, or other account that pays interest \u2014 and it includes compounding interest.<\/p>\n\n\n\n<p>The compound interest piece is key to understanding what APY is. Compounded interest is when the interest you earn is added back to your account in set periods (daily, monthly, etc.). Then, with each dollar you earn, you have a little more money earning interest for you each period.&nbsp; In other words, you\u2019re earning interest on interest.<\/p>\n\n\n\n<p>The bottom line is the higher the APY, the more you earn!<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-what-is-interest-rate\">What is interest rate?<\/h2>\n\n\n\n<p>You may find the term interest rate in a few scenarios and depending on the scenario, the definition of what an interest rate is will change. For example, an interest rate could apply to a loan or to an interest-bearing deposit account (such as a savings account) \u2014 both are shown using a percentage and are calculated on an annual basis.<\/p>\n\n\n\n<p>In the case of a:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>loan<\/strong>, the interest rate is what the lender charges you when you borrow money as a percentage of the amount loaned.<\/li>\n\n\n\n<li><strong>savings account<\/strong>, the interest rate is what the bank pays you as a percentage of the amount deposited (your principal).<\/li>\n<\/ul>\n\n\n\n<p>If the interest isn\u2019t compounded, it\u2019s considered simple interest.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-what-s-the-difference-between-interest-rate-vs-apy\">What\u2019s the difference between interest rate vs. APY?<\/h2>\n\n\n\n<p>Now that you have interest rate and APY concepts under your belt, you can see both have to do with earning money based on a percentage of what you deposit. But if these words aren\u2019t interchangeable, what <em>is<\/em> the difference between APY vs. interest rate? &nbsp;<\/p>\n\n\n\n<p>In short, the distinction of interest rate vs. APY is compounding. When you earn money based on a simple interest rate it is referring to the rate of interest available each day while APY includes the interest earned and compounded based on the disclosed daily, monthly compounding schedule.&nbsp;<\/p>\n\n\n\n<p>Check out our article on <a href=\"https:\/\/www.sprucemoney.com\/resource-center\/mobile-banking\/what-is-compound-interest\/\">compounding interest<\/a> for a deeper dive, but essentially, here\u2019s the difference between APY and interest rate percentages:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Interest Rate \u2013 this is the money paid by the bank as a daily rate on the money in your interest- bearing deposit account. The key is the simple interest rate percentage number does <strong>not<\/strong> include compounded interest.<\/li>\n\n\n\n<li>APY \u2013 this is the interest money you earned in your account calculated over one year. This percentage includes the compounded interest which was credited to your account.<\/li>\n<\/ul>\n\n\n\n<p>In general, an APY for a given account will be somewhat higher than the account\u2019s interest rate because the APY is accounting for the money earned over the full year.<em>.<\/em><\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-benefit-of-apy-vs-interest-rate\">Benefit of APY vs interest rate<\/h3>\n\n\n\n<p>If you think of compound interest as money being added to your initial pool of dollars, it\u2019s easy to see that the pool will grow when your interest compounds, and as you\u2019re saving, you\u2019ll have more and more money working for you over time. T. Making your money work harder for you without lifting a finger? Yes, please!<\/p>\n\n\n\n<p>One last thought on APY vs. interest rate:&nbsp; All accounts with an interest rate will have an APY, so it\u2019s not really an either-or situation \u2014 rather it\u2019s more about understanding how they\u2019re related so you understand what\u2019s being advertised.&nbsp;<\/p>\n\n\n\n<p>Next, we should note that there are a couple of other terms that fit into the APY and interest discussion. Let\u2019s take a quick pass over them.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-apye-vs-apy\">APYE vs. APY<\/h3>\n\n\n\n<p>Where APY measures the rate that was earned over a year, APYE (annual percentage yield earned) measures the actual amount earned in a <em>specific<\/em> account periodically. That means the percentage can be unique to the account holder.<\/p>\n\n\n\n<p>Why is that? APYE accounts for any deposits and withdrawals made during the statement period, which impacts the total interest earned for that period. Not everyone will make deposits and withdrawals at the same time.<\/p>\n\n\n\n<p>The hypothetical example in the following table helps illustrate this. Let\u2019s say Olivia and Dex both deposit $1,000 into an account; Olivia makes her deposit on June 1 and Dex makes their deposit on June 15.&nbsp;<\/p>\n\n\n\n<p><\/p>\n\n\n\n<p><\/p>\n\n\n\n<figure class=\"wp-block-table is-style-stripes\"><table class=\"has-fixed-layout\"><tbody><tr><td>&nbsp;<\/td><td>Olivia<\/td><td>Dex<\/td><\/tr><tr><td>Average Daily Balance<\/td><td>$&nbsp;1,000.00&nbsp;<\/td><td>$&nbsp;1,000.00<\/td><\/tr><tr><td>Days in year<\/td><td>365<\/td><td>365<\/td><\/tr><tr><td>Days in month<\/td><td>30<\/td><td>15<\/td><\/tr><tr><td>Interest payment received<\/td><td>$3.00&nbsp;<\/td><td>$&nbsp;1.50<\/td><\/tr><tr><td>Actual Percentage Yield Earned<\/td><td>3.71176%<\/td><td>3.71459%<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<p>So, while knowing the APY can help you compare your earning potential across different products and financial institutions, APYE helps you see how much you\u2019ve actually earned once you\u2019ve set up an account.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">APR vs. APY<\/h3>\n\n\n\n<p>Earlier we mentioned that interest rates can apply to loans. Another term you\u2019ll hear in respect to loans is Annual Percentage Rate (APR), which is the interest rate plus additional fees and costs (examples could be lender fees, closing costs or insurance.)<\/p>\n\n\n\n<p>With one letter difference, it can be tricky to remember the difference between APR vs. APY.<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>APR<\/strong> \u2013 This is a percentage you pay. Financial products with an APR include credit cards, auto loans, student loans, personal lines of credit, and more.&nbsp;A higher APR means you pay more.<\/li>\n\n\n\n<li><strong>APY<\/strong> \u2013 This is a percentage you earn. Financial products with an APY include savings accounts, Certificates of Deposit (CDs), money market accounts or other interest-bearing accounts. A higher APY means you earn more.<\/li>\n<\/ul>\n\n\n\n<p>For more on APR, check out our post: <a href=\"https:\/\/www.sprucemoney.com\/resource-center\/planning\/what-does-apr-mean\/\">What does APR mean<\/a>?<\/p>\n\n\n\n<h1 class=\"wp-block-heading\">What economic factors can affect my interest rate or APY?&nbsp;<\/h1>\n\n\n\n<p>We should point out that interest rates are not static as they are tied to other factors in the economy \u2013 namely the federal funds rate. The federal funds rate is the rate that banks charge for borrowing and lending money to other banks and financial institutions. This, in turn, affects the interest rate that banks charge or offer individual customers for loans, savings, and investments.<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>For borrowers, a low interest rate is great because it means less money they need to pay back with their loans.<\/li>\n\n\n\n<li>For savers, however, a low interest rate means a lower APY, and less money earned. So while it\u2019s important to look for banks and services offering high APY rates, just keep in mind that those rates aren\u2019t set in stone and may change occasionally.<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\">What else should you know about?&nbsp;<\/h2>\n\n\n\n<p>Now that we know how APY is affected by the federal funds rate, it\u2019s also important to note that the interest you earn doesn\u2019t all go straight to your pocket. Interest received on savings accounts, certificates of deposits, and money market accounts is considered taxable income by the IRS and must be reported each year. The interest is taxed at your earned income tax rate, but don\u2019t worry \u2014 only the interest you receive is taxed, not your full balance.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Spruce Savings Account offers high-yield APY and so much more<\/h2>\n\n\n\n<p>Spruce offers many features that can help you save and manage your money.<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><a href=\"https:\/\/www.sprucemoney.com\/savings-interest\/\">Interest savings<\/a>: With Spruce, once you opt in*, you can benefit from earning interest on your savings in your Extra Saving account and in two saving goals that you can easily set up. Find out <a href=\"https:\/\/www.sprucemoney.com\/resource-center\/help\/account-information\/interest-opt-in\/\">how to opt in to interest with Spruce<\/a><\/li>\n\n\n\n<li><a href=\"https:\/\/www.sprucemoney.com\/resource-center\/help\/saving-goals\/what-is-round-up\/\">Round up<\/a>: Opt-in and when you use your debit card, we\u2019ll round up the transaction to the nearest dollar and deposit the difference in your Extra Saving account.<\/li>\n\n\n\n<li><a href=\"https:\/\/www.sprucemoney.com\/budget-tracker-tool\/\">Budget tracker tool<\/a>\u00a0  Spruce automatically categorizes your transactions to keep you aware of how much you\u2019re spending and where you might want to cut back.<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-take-advantage-of-earning-interest-with-spruce-toda-y\"><strong>Take advantage of earning interest with Spruce toda<\/strong>y<\/h2>\n\n\n\n<p>Spruce has the tools to help you take control of your finances. Ready to take advantage of earning 3.50% APY<sup><button data-disclaimer-trigger=\"12\" class=\"js-disclaimer-link\"><span class=\"reader\">Disclaimer number<\/span><span>12<\/span><span class=\"reader\">. Go to disclaimer for more details.<\/span><\/button><\/sup>&nbsp;on your savings balances and all the other&nbsp;<a href=\"https:\/\/www.sprucemoney.com\/features\/\">features\u202fSpruce<\/a>&nbsp;has to offer?&nbsp;<\/p>\n\n\n\n<p><a href=\"https:\/\/account.sprucemoney.com\/signup\/\">Get started with Spruce today!<\/a>&nbsp;And then follow the steps to&nbsp;<a href=\"https:\/\/www.sprucemoney.com\/resource-center\/help\/account-information\/interest-opt-in\/\">opt into interest with Spruce<\/a>. &nbsp;<\/p>\n\n\n\n<p><em>This information provided for general educational purposes only. It is not intended as specific financial planning advice as everyone\u2019s financial situation is different.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Diving into the nuances of financial jargon may not be tops on your to-do list, but if you\u2019re wanting to\u2026<\/p>\n","protected":false},"author":1,"featured_media":2421,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"inline_featured_image":false,"footnotes":""},"categories":[48,3],"tags":[],"class_list":["post-2415","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-mobile-banking","category-savings"],"acf":[],"yoast_head":"<title>Difference Between APY vs. Interest Rate | Spruce<\/title>\n<meta name=\"description\" content=\"What is APY and how is it different from interest rate? 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