Compound Interest

Compound interest is interest paid on interest (as opposed to interest paid on the principal amount of the loan). For example, if I lend you $100 at 10% interest per year, at the end first year (assuming you haven’t paid me anything) you’ll owe me $110 (the original sum plus $10 in interest). 10% of $110 is $11, so at the end of the following year you’ll owe me $121 – and the following year $133.10… and so on. Compound interest is how loans can build up so quickly, especially those with high interest rates – like payday loans, which often have interest rates of 300% and up (if I lent you that same $100 but at 300%, after three years you’d owe me a whopping $6,400).