Topic
Compound interest
Compound interest means interest can be calculated on both the original principal and interest that has already been added to the balance.
At a glance
- Core inputs
- Principal, rate, time
- Main effect
- Interest can earn or incur additional interest
Overview
Compounding causes a balance to grow differently from simple interest because prior interest becomes part of the amount used for later calculations. The effect depends on the rate, compounding frequency, time, deposits or withdrawals, and fees. In savings this can accelerate growth; in debt it can increase what is owed.
Time changes the result
Because each compounding period can build on the previous one, differences become larger over longer periods. Starting earlier or paying debt down sooner can therefore have effects that are bigger than a one-period comparison would suggest.
Rate labels need context
A quoted annual rate does not always tell the full story because products can differ in compounding conventions, fees, and whether the relevant comparison is an interest rate, APY, or APR. Compare products using the disclosure measure designed for that product type.
Sources and review
MOOR's explanatory text is supported by the following source links.
- Compound Interest Calculator — Investor.gov
- Savings account basics — Consumer Financial Protection Bureau