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Compound interest (or compounding interest) is interest added on the principal sum as well as on the interest of the previous period of a deposit or a loan.  In other words, its the accumulation of interest on interest. Compound interest will grow a sum of money at a faster rate than simple interest (or nominal interest), where the interest is not added to the principal.

Let’s have a look at an example. If we calculate the compounded interest on €1.000 at 5% for a period of 10 years, we get €1.000 x (1 + 5%)10 = €1.628,89. With simple interest the total amount would be: €1.000 + 10 x €1.000 x 5% = €1.500.

compounding interest