What is APY?

If you’re interested in opening a high-yield savings account, Certificate of Deposit, or another savings account, it’s important to understand the meaning of APY and how it might relate to interest rate and compound interest.

APY, interest rate, and compound interest are related yet separate terms that usually matter to anyone looking to open a saving account. We’ll cover each term in detail below.

APY – annual percentage yield – is one of the first features you might notice when opening a savings account. APY is a percentage rate reflecting the total amount of interest paid on an account, which is based on the interest rate and the frequency of compounding interest for a one-year period.

In other words, APY is almost always a higher number than the actual interest rate because APY is based on more than just the interest rate.

APY can apply to the money you keep in any deposit account, including:

Banks are required to state their rates in APY, which is why you might notice the account APY when shopping online for a savings account before noticing the account interest rate.

Both APY and interest rate are expressed as percentages, but what makes them different is compound interest.

Compound interest is interest applying to the initial principal of an investment and to the accumulated interest from previous periods. With compounding interest, you earn interest on both the money you’ve saved and the interest you earn.

APY reflects the interest rate and the frequency of compounding interest for a one-year period. If you want to learn more about how compounding interest works, head over to our Growth Savings page to use our savings calculator.

APR – annual percentage rate – does not apply to those looking to open a savings account. In fact, it is very different. APR is related to the cost of borrowing money, not saving money.

Specifically, APR lets you know the amount of interest you might be charged when you borrow money from another entity. The lower the APR, the less interest you’ll pay on the money you’ve borrowed.

For savings products like Growth Savings, you don’t need to worry about APR.

When shopping for a high-yield savings account with a high APY like Growth Savings, consumers tend to kickstart their research by comparing different deposit accounts offering the highest APY. This is because the higher the APY, the more you will earn over time.

Other considerations when comparing savings accounts might include the security of the bank. Forbright Bank, for example, is FDIC-insured.

You also might consider fees a bank charges for services related to the product, the flexibility and convenience of a savings product, and the mission or impact of the bank offering the product.

Growth Savings gives you the opportunity to earn more money – with its high APY, no fees, no minimum balance requirement, and unlimited number of transfers – and help build a more resilient future.

This article is for general information and education only.