Lossy file compression results in lost data and quality from the original version. Lossy compression is typically associated with image files, such as JPEGs, but can also be used for audio files, like MP3s or AAC files. The "lossyness" of an image file may show up as jagged edges or pixelated areas. In audio files, the lossyness may produce a watery sound or reduce the dynamic range of the audio.

Because lossy compression removes data from the original file, the resulting file often takes up much less disk space than the original. For example, a JPEG image may reduce an image's file size by more than 80%, with little noticeable effect. Similarly, a compressed MP3 file may be one tenth the size of the original audio file and may sound almost identical.

The keyword here is "almost." JPEG and MP3 compression both remove data from the original file, which may be noticeable upon close examination. Both of these compression algorithms allow for various "quality settings," which determine how compressed the file will be. The quality setting involves a trade-off between quality and file size. A file that uses greater compression will take up less space, but may not look or sound as good as a less compressed file. Some image and audio formats allow lossless compression, which does not reduce the file's quality at all.

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