Define compound interest?

Amongst the two types of interest, compound interest is one of the types of interest. Whenever a loan is taken, the interest is calculated for the very first period, it could be either a month or a year. Then this interest is added to the original principal amount and the next interest is taken on the new amount calculated.

Compound Interest, does generally sound very complicated. People taking a loan on the compound interest feel very burdened mentally as they feel they have to pay a lot more amount as compared to the simple interest. Hence, let us look at an example to clear the misconception about how compound Interest works:

A numerical example of Compound interest.

For instance you borrow an amount of$3,000for a period of 3 years, at an interest rate of 10% annually on the amount borrowed. However, you end up not making a debt payment regularly. In such a scenario the amount which you will have to pay back will be bifurcated as follows:
1^st Year: $3,000 x 10% = $300.
2^nd Year:$3,300 x 10% = $330.
3^rd Year: $3,630x 10% = $363.

The total amount which you will have to pay after the end of 3 years will be $3,993 out of which, $993 is the sum of the interest of year 1, year 2, and year 3.

If you taken a loan on compound interest, please note that if you pay regular installments of the loan, the amount of total compound interest will be much lower. This is because the remaining amount of principal of the loan will be decreasing an the interval of each compound interest. You can even use a loan calculator to try out the calculation on your own.