What is Compound Interest

Definition of Compound Interest Rate:-is the amount applied to the principal but also on the accumulated interest of previous periods. It a common trend for some lenders to go via compound interest method when approving a loan for you, and you are required to pay even more in interest if you choose this method

Compound interest also called interest on interest which is applied to the principal amount but also on the accumulated interest of previous periods. The bank or the lender assumes that at the end of the first year the borrower owes the principal plus interest for that year.

The lender also assumes that at the end of the second year, the borrower owes the principal plus the interest for the first year plus the interest on interest for the first year.

The interest owed when compounding is higher than the interest owed using the simple interest method. The interest is charged monthly on the principal including accrued interest from the previous months. For shorter time frames, the calculation of interest will be similar for both methods. As the lending time increases, however, the disparity between the two types of interest calculations grows.

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