interest compound

What is interest compound?

     Essentially, interest compound is adding accumulated loan interest for a lender specified period of time to principal balance (principal balance is what you borrowed from the lender). What this means is if you take out 10,000$ loan for 5 years with monthly interest compound, this will mean that at the end of each month, the interest is going to be added to your 10,000$ principal balance for the duration of the loan.

For example:

     The first month's interest is 70$, compounded monthly, and your monthly payment is 300$, this means that at the end of the first month, your principal balance is going to be 10,000$ plus 70$, minus your monthly payment, which is going to make your principal balance 9,770$.

     The next month, the interest will compound according to your interest rate from principle balance of 9,770$. Look into APR vs APY distinction for more info on calculating total loan costs based on interest compound.

 Why is this important?

     When you take out a loan at the bank, they will often inform you of your interest rate that you will pay per year. However, oftentimes you will have to ask how they compound interest, which can make a great difference in the long run. If they compound quarterly, rather than monthly, and interest rates for lenders you are comparing is the same, it makes sense to go with the lender that compounds quarterly. This will save you quite a bit of money in the long run.

How can I find out what the compound terms are?

     The lender must provide you with this information, it can be found in loan's terms and conditions.

I want more information about interest compound.

     Look at our APR vs APY distinction article that explains in-depth how interest compounding affects your total loan cost and how to calculate it based on APR.