In personal finance, interest earned on both the original money and earlier interest is called compound interest.
With simple interest, each period’s interest is calculated only on the original principal. With compound interest, unpaid or reinvested interest becomes part of the balance used for later calculations. This creates growth that can accelerate over time, assuming the rate and compounding rules remain unchanged.
The same mechanism can help savers and hurt borrowers. A deposit or investment can compound when returns remain invested, while a credit-card balance can grow when unpaid interest is added to the amount owed. Actual products may compound daily, monthly, quarterly, or annually, so the stated annual rate alone does not tell the whole story.
Compound interest is not a guarantee of investment profit. Market investments have changing returns, fees, taxes, and possible losses. For loans, the agreement determines whether interest compounds and how payments reduce the balance.