What Is Compound Interest?

Compound interest is the process where interest is calculated not just on the initial amount (principal), but also on the interest that has already been added to the account or loan.

Overview of Compound Interest

Compound interest allows money to grow faster than simple interest, which is only calculated on the principal. The more frequently interest compounds—daily, monthly, annually—the greater the effect over time. It’s a powerful force in building wealth through savings or investments, but it can also increase the total amount owed on debt if you’re borrowing. Understanding how compound interest works helps people make smarter financial choices about saving, investing, and borrowing.