Calculator

The Real Cost of Compounding

A 12% nominal APR compounded monthly is an APY of 12.68% — a 0.68-point gap. Compounded daily the gap widens slightly. For loans the APR understates cost; for deposits the APY overstates earned — always compare APY to APY.

Results

Visualization

Cashbizly provides illustrative business estimates only. Results depend on your inputs and assumptions and are not accounting, tax, or legal advice. Consult a CPA or financial advisor before major decisions. Tax-year figures (mileage, QBI, SEP, etc.) are labelled by year and should be verified at IRS.gov.

How It Works

APY = (1 + APR/n)^n - 1, where n is compounding periods per year. The more frequent the compounding, the larger the gap between nominal APR and effective APY. This is the Truth-in-Savings / TILA standard for stating effective rates.

What Should You Do?

Scenario 1: a '12%' credit card compounding daily is really ~12.75% APY. Scenario 2: a savings account at 5% APY monthly is 4.89% APR — the APY is the honest number to compare. Scenario 3: at annual compounding APR = APY.

Frequently Asked Questions

Why does the gap matter?

It is the difference between advertised and real cost/return. Regulators require APY so consumers can compare like-for-like.

APR or APY for loans?

Compare loan APRs (they already include fees in many cases); for deposits compare APYs.

Does compounding daily beat monthly?

For the same APR, more frequent compounding gives a higher APY (costs more as a borrower, earns more as a saver).

Authoritative References

Investopedia — APY — Annual percentage yield and compounding.
Consumer Financial Protection Bureau — Truth-in-lending and APY disclosure rules.