Glossary

Compound interest: what it means

Compound interest is interest charged not only on the original amount but also on interest earned earlier.

Compound interest means interest is calculated on an amount that already includes previous interest. Unlike simple interest, where income is the same every year, here it grows each year.

Example: UAH 100,000 at 10% a year with annual compounding grows to UAH 259,374 in 10 years, while simple interest would give only UAH 200,000. The longer the term, the bigger the gap: that is why time matters more than the size of contributions.

The same mechanism works against you with debt: unpaid interest on a loan can also start earning interest.

In detail, with examples: Compound interest: how money multiplies and why time beats amount

Related terms

Interest capitalisation Inflation Deposit

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