| Short term loans

What Is Compound Interest?

Interest rates. Although they are significant, they are also difficult to comprehend. Nevertheless, we must comprehend them because they have an impact on everybody who takes out credit of any kind. There are several different types, which is a concern. So we look at one type, and answer the question – what is compound interest?

Simple And Compound

The adding of interest to the loan or deposit principal is known as compound interest. In essence, it is interest on interest. It occurs when interest is reinvested rather being paid out, resulting in interest being generated on both the principal amount and any accumulated interest over the next period. Simple interest is calculated on the principal sum alone, not on the new balance after periodic interest has been added. Thus, compound interest will continue to grow.

What Is Compound Interest? Working Example

You borrow £100, which you expect to pay back two months later. Each month, interest is applied at a rate of 10%. Unlikely but used to demonstrate how interest works With simple interest, you would pay £10 after the first month and another £10 after the second, for a total of £20 in interest. Compound interest, on the other hand, results in a £10 interest payment for the first month. You do not, however, pay interest on the initial £100 borrowed during the second month. After a month, you pay 10% of the £110 amount that has interest added. Therefore, your second payment is £11. And if the loan lasted longer, you would pay 10% of £121 in the third month. Hence, you can see how interest varies with different systems. And how it can grow too. 

Little Cause For Concern

In order to make loans more accessible in the UK and to make the interest calculation simple, the FCA determined that short-term loan providers could only calculate interest in accordance with the simple interest calculation in 2015. Importantly, borrowers can comprehend basic interest better. They are aware of the required repayment because interest is always being imposed.

What Is Compound Interest? Its Advantages

As a loan broker, it goes without saying that we have examined how compound interest may impact you as a borrower. But if compound interest has losers, there must inevitably be winners as well. Therefore, employing compound over simple will result in greater financial growth if you have savings with such an interest system. The more money you have for a longer period of time, the more it will increase your initial sum. Your savings can grow even if you don’t make any more contributions.


Even if it may not mean much to you or me, let’s get started nevertheless! Compound interest rates are calculated using the formula P = C (1 + r/n)nt, where C stands for the original deposit, r for the interest rate, n for how often interest is paid, t for how long the money is invested, and P for the total value of your savings.

Is that understood? You don’t need to worry about having to manually enter all the numbers if you are unfamiliar with equations because there are a lot of online programmes that can do it for you.

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