APY vs. Interest Rate: What’s the Difference?

APY and interest rate both describe how savings may earn interest, but they communicate different information. Reviewing these figures together with fees, account requirements, access, and other terms may help you compare savings accounts.

Key highlights: 

• APY reflects the effect of compounding over a one-year period.
• The stated interest rate does not include the effect of compounding. 
• APY can provide a useful basis for comparing deposit accounts with different compounding frequencies.
• Compounding frequency can affect APY and total interest earned when the stated interest rate and other assumptions remain the same. 
• Fees, balance requirements, access, and other account terms should also be considered when comparing savings accounts. 

 

What is an interest rate? 

 

For a savings account, the interest rate is the percentage used to calculate interest on the account balance before accounting for compounding. In a hypothetical simple-interest illustration, a $1,000 balance earning a 3% annual rate produces $30 in interest after one year. 
Actual savings account earnings depend on the institution’s calculation method, compounding frequency, balance activity, fees, and account terms.

What is APY? 

 

APY is an annualized measure that reflects the interest rate and frequency of compounding.¹ It can help consumers compare the potential annual yield of deposit accounts, although actual earnings depend on factors such as balance activity, rate changes, fees, and account terms. Compounding occurs when interest is calculated on the original balance and on interest previously added to the account.² When an account compounds interest, its APY may be higher than its stated interest rate.

 For example, a $1,000 balance earning a hypothetical 3% stated annual interest rate compounded monthly would have an effective annual yield of approximately 3.042% and an ending balance of approximately $1,030.42 after one year, assuming the rate remains unchanged and there are no deposits, withdrawals, or fees.¹ This example is illustrative only; actual earnings vary based on account terms and activity.

 

Key differences between APY and interest rate 

 

APY and interest rate are related, but they communicate different information. The table below provides a general comparison. 

How to compare accounts using APY and interest rate  

 

APY can be useful when comparing deposit accounts because it incorporates compounding into a one-year measure. However, APY should not be reviewed in isolation. Consider whether the rate is variable, how frequently interest compounds, and whether fees or balance requirements may affect the account. 

• APY: Compare the disclosed Annual Percentage Yield and review whether it is variable. 
• Fees: Review maintenance fees and other charges that may reduce the account balance or earnings. 
• Balance and deposit requirements: Check whether a minimum opening deposit or balance is required to open the account, avoid fees, or earn a stated APY. 
• Access: Review available transfer and withdrawal methods, limits, holds, processing times, and other account terms. 
• Deposit insurance: Confirm that the bank is FDIC-insured. Eligible savings deposits at FDIC-insured banks are insured up to applicable limits, subject to FDIC rules.³ 

 

How compounding frequency affects APY and your earnings 

 

Compounding frequency describes how often earned interest is added to the account balance. When the same stated interest rate and all other assumptions remain unchanged, more frequent compounding generally results in a slightly higher APY. However, the difference may be small, and compounding frequency should not be considered by itself when comparing savings accounts. Review the disclosed APY, fees, balance requirements, access, and other account terms.

 

Learn more about the Openbank High Yield Savings account

 

An Openbank High Yield Savings account may be an option to consider when comparing savings accounts. Review the current APY, fees, eligibility requirements, access options, and applicable disclosures to determine whether the account aligns with your needs. Learn more about the Openbank High Yield Savings account or apply for an account online.  

Sources:

¹ Consumer Financial Protection Bureau, Appendix A to Part 1030: Annual Percentage Yield Calculation. Accessed October 9, 2026.
² FDIC, Money Smart for Young People, Grades 6–8 Educator Guide, “Understanding Compound Interest.” Accessed October 9, 2026.
³ FDIC, Deposit Insurance. Accessed October 9, 2026.

This content is for informational purposes only and does not constitute financial, legal, or investment advice. Please consult Openbank’s website or speak to a representative for the most up-to-date information.

©2026 Santander Bank, N.A. All rights reserved.  

Openbank is a division of Santander Bank, N.A. Member FDIC. Deposits at Santander Bank and its Openbank division are combined for FDIC insurance purposes and are not separately insured.