Compound interest is interest calculated on the sum of the initial amount of either an investment or a loan plus any interest already accumulated. Since compound interest generates “interest on interest,” it makes a sum grow at a faster rate than simple interest. Whether this acceleration is good or bad depends on whether you’re collecting compound interest on an investment or paying it out as a borrower.
Compounding is widely used to calculate interest for most investment vehicles, loans (such as mortgages, auto, and small-business loans), and credit cards.
