Breakdown
How it works
If interest compounds monthly at 6% APR, each month earns 0.5% on a growing balance, so a year actually yields 6.17%. The more frequent the compounding, the larger the gap. Comparing an APR against an AER directly overstates the loan or understates the savings.
Formula
APY = (1 + APR ÷ n)ⁿ − 1
APR = n × ((1 + APY)^(1/n) − 1)
Worked example
6% APR compounded monthly = 6.168% APY; daily = 6.183%; annually = 6%.
Frequently asked questions
What is the difference between APR and AER?
APR is quoted on borrowing and includes fees but ignores intra-year compounding; AER/APY is quoted on savings and includes compounding. Both are annual figures.
Which should I compare when choosing a loan?
APR, because it is the regulated like-for-like figure including fees. For savings, compare AER.
Does compounding frequency matter much?
Monthly vs daily differs by hundredths of a percent. Annual vs monthly differs more — 10% APR is 10.47% APY monthly.