Understanding Compound Interest and Loans
Compound interest is often called "interest on interest" - it's when your investment earnings are reinvested to generate additional earnings over time. This powerful concept can work both for and against you:
Key Terms:
- Principal: The initial amount you invest or borrow
- Interest Rate: The annual percentage rate applied to the principal
- Compounding Frequency: How often interest is calculated and added to the principal
- Time Period: The duration of the investment or loan
Formula:
A = P(1 + r/n)^(nt)
Where:
- A = Final amount
- P = Principal
- r = Annual interest rate (decimal)
- n = Number of times interest is compounded per year
- t = Time in years