How APY Works: Interest, Compounding and Variable Rates
The number on every savings page, decoded.
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APY vs interest rate
Annual percentage yield (APY) is what you earn in a year once compounding is counted. Under federal Truth in Savings rules (Regulation DD), banks must disclose it. The interest rate alone ignores compounding, so the APY is equal or higher.
Why compounding matters
Interest that is compounded daily, as Ally and others note, earns interest on itself. Over a year that adds a little to the base rate.
Variable vs fixed
- Savings and money market: variable. The bank can change it after you open.
- CDs: fixed for the term, with a penalty to withdraw early. See best online CDs.
Use it to compare
Compare APYs from the same date. See Marcus vs Ally savings.
The formula
Regulation DD, Appendix A, defines APY as:
APY = 100 x [(1 + Interest / Principal)^(365 / Days in term) - 1]
For a full year (365 days) that reduces to interest earned divided by principal. Example: if $1,000 earns $35 over 365 days, the APY is 3.50%.
APY vs APR at a glance
| Term | Includes compounding? | Where you see it |
|---|---|---|
| APY | Yes | Savings, money market, CDs |
| Interest rate | No | Listed next to APY on deposit pages |
| APR | No (for loans, it includes some fees) | Credit cards and loans |
Related: Ally money market vs savings, best no-fee checking.
Frequently asked questions
What is the difference between APR and APY?
APY includes compounding over a year; the interest rate does not.
Can my APY change?
On savings and money market accounts, yes. Issuers call these rates variable.
