Compound Interest

Compound interest is interest that is calculated not just on the original loan or deposit — the principal — but also on the interest already added. This concept is often referred to as interest on interest. In contrast, simple interest is calculated only on the principal amount. There is a formula for finding how compound interest affects the balance of a savings account or loan.

The variables used in the formula are defined as:

• A is the amount of money accumulated after t years, including interest
• P is the principal amount
• r is the annual interest rate in decimal form
• n is the number of times that interest is compounded per year
• t is the time spent paying back the loan in years