APR vs APY explained

What are APR and APY?

APR and APY are two ways to express interest or returns on your money or investment on an annual basis. You encounter APR and APY in, among other things, savings accounts and lent capital, but also within the crypto market: lending, staking and liquidity pools within DeFi platforms

APR stands for Annual Percentage Rate, meaning the yearly interest rate you pay or receive, without accounting for compounding (interest-on-interest). It gives you an indication of the expected annual return, expressed as a percentage of the amount at that moment

APY stands for Annual Percentage Yield, meaning the annual return that does take compounding into account. This means APY assumes that the interest you receive periodically is added to your balance and subsequently also earns (additional) interest (through reinvestment/compounding)

Because of this assumption, APY is often higher than APR.

Key Takeaways

• APR is the “base interest rate” on an annual basis and usually does not account for compounding.
• APY is the effective annual return and does include compounding.
• The more frequently interest is credited (for example weekly instead of monthly), the higher the APY can be at the same base rate.
• Without compounding, you only earn interest on your initial amount, while with compounding you also earn interest on previously received interest.

What is the difference between APR and APY?

The difference between APR and APY lies in compounding. With APR, interest is calculated only on the original amount. APY takes compounding into account and shows what you earn on an annual basis if received interest is added to your balance and then earns returns itself. How much you ultimately receive therefore also depends on how often interest is credited (for example weekly instead of monthly): the more frequently compounding occurs, the higher the effective annual return at the same base rate.

In practice, APY is often used for products where interest is credited regularly and can be (automatically or not) reinvested, such as savings products and crypto applications like staking and lending. Some providers still communicate only an APR (the nominal annual rate). In that case, APY often provides a more realistic picture of your annual return, but only if the interest is actually reinvested and the rate remains more or less stable over the period

Simple explanation of APR

APR (Annual Percentage Rate) is the expected annual interest rate without compounding. Suppose you want to lend 100 crypto tokens via DeFi to earn interest through lending. The platform indicates that you earn 10% APR on the initial amount, meaning 100 tokens. Based on the starting amount, you would then have 110 tokens after one year.

The APR calculation is relatively simple:

The basic formula is:
Interest per year = Initial amount × APR

Example:
You lend 100 tokens at 10% APR.
The interest after one year is:
100 × 0.10 = 10

Your final amount is:
100 + 10 = 110 tokens

APR simply provides a base interest rate and does not assume that you reinvest interest paid out periodically. It therefore gives a flat expectation that does not take compounding into account

APR is useful if you want to understand the rate itself, but less useful if your product automatically applies compounding. In that case, you want to know what you effectively earn on an annual basis, and that is where APY comes in

Simple explanation of APY

APY (Annual Percentage Yield) shows what you earn on an annual basis when compounding is included. This means that the interest you receive during the year is reinvested or automatically added to your balance, allowing you to earn interest on a larger amount in the next period.

The more frequently compounding occurs, the higher the APY will be (at the same base rate). That is why a product with a “base rate” of, for example, 10% can ultimately result in an APY of approximately 10.51% if interest is credited weekly and reinvested.

The APY calculation is more complex than APR because you must account for the fact that you receive interest periodically that you immediately reinvest.

The basic formula is:
APY = (1 + r/n)ⁿ − 1 Here, r is the annual interest rate (as a decimal, so 10% = 0.10) and n is the number of times per year the interest is compounded/credited (for example, 52 for weekly or 12 for monthly).

Example:
You lend 100 tokens at 10% (base rate) with weekly compounding.

The APY is then:
(1 + 0.10/52)⁵² − 1 ≈ 0.1051 = 10.51%

Your final amount is:
100 × (1 + 0.10/52)⁵² ≈ 100 × 1.1051 = 110.51 tokens

So: with 10% APR without compounding you end up with 110 tokens, but with weekly compounding (APY) you end up with approximately 110.51 tokens.

Important to remember: APY usually assumes reinvestment at the same rate throughout the entire year. In practice, that rate can vary, especially with variable rates in crypto and DeFi. APY is therefore a useful comparison metric, but it remains based on assumptions.

Is APR or APY better?

Which interest calculation is better depends entirely on what you want to use it for and which product you are comparing. If you want to calculate expected annual interest without planning to reinvest your interest, APR is often the clearest option

If you plan to reinvest your interest to earn compound interest, APY gives you a better picture. Within crypto, platforms often automatically reinvest interest, making APY a more realistic indicator

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Final thoughts

APR and APY may look similar at first glance, but they do not measure the same thing. APR mainly shows the base interest rate on an annual basis and is therefore useful for quickly comparing rates or when you do not allow interest to compound. APY goes a step further and shows the effective annual return once compounding plays a role, for example when interest is credited and reinvested regularly. As a result, APY is usually a more realistic percentage for products with compounding, especially in crypto where payouts often occur more frequently. However, always pay attention to the assumptions: APY assumes that interest is actually reinvested and that the rate does not continuously change. If you truly want to know what to expect after a year, do not just look at the percentage, but also consider how often interest is paid, whether compounding happens automatically, and whether the rate is fixed or variable.