Compound interest

Compound interest is to be found everywhere. Sometimes it works for you, in terms of savings and investments.

More often compound interest is that nasty thing that means you pay a lot more than you think you will at the start: on a loan product such as a standard loan or of course a home loan, aka a mortgage.

So it is important to understand what compound interest is and just how it works.

Essentially, this is interest that gets added to the interest that was previously earned (or accrued) on a particular balance. Since it is COMPOUNDED on top of the existing interest it is good for a saver and good for someone who has lent money.

With the effect of compounding, the rate of interest is called the effecitve rate. Because of the effect of compounding, the more often the interest is compounded, the higher the effective rate becomes (good for savers, bad for those with debts).

Related Articles

Limited Liability Company
Lock-in period
Early withdrawal penalty
Interchange Rate

More Financial Words and Vocabulary Explained