What is compound interest?

Indeed, compound interest is a type of interest where the interest earned on an investment or loan is added to the principal amount, so that future interest calculations are based on this new total. This means that over time, your money grows at an increasing rate—interest on interest. For example, if you invest £100 with a compound interest rate of 5% per year, after one year you'll have £105. After the second year, the interest is calculated on £105, resulting in £110.25. This effect can significantly boost your savings or increase the cost of a loan over time.