What Is Compound Interest?

Compound interest (or compounding interest) is the interest on a loan or deposit calculated based on both the initial principal and the accumulated interest from previous periods. Thought to have originated in 17th century Italy, compound interest can be thought of as "interest on interest," and will make a sum grow at a faster rate than simple interest, which is calculated only on the principal amount.

Key Points

  • Compound interest (or compounding interest) is interest calculated on the initial principal, which also includes all of the accumulated interest from previous periods on a deposit or loan.
  • Compound interest is calculated by multiplying the initial principal amount by one plus the annual interest rate raised to the number of compound periods minus one.
  • Interest can be compounded on any given frequency schedule, from continuous to daily to annually.
  • When calculating compound interest, the number of compounding periods makes a significant difference.

How can a compound interest calculator help you?

The nature of compound interest makes it extremely lucrative for businesses. When you use a compound interest calculator online, you can avail the following benefits.

  • It helps you determine an accurate figure and percentage of returns over a certain time frame.
  • A reliable compound interest calculator helps you identify how much investment you might need over a time frame. The required corpus of funds can then be arranged with convenience.
  • Number of financial organizations offers you a customizable compound interest rate calculator which helps you assign values based on your requirements.
  • A compound interest calculator helps calculate the total returns as well as yearly returns in case you need to consider breaking such an investment as per your future financial planning. If so, it is also advisable to consider pre-closure charges of the investment corpus.