If you borrow and then you don't pay your interest for the year, then the interest is added to the total of the loan. Consequently, you will pay interest on the interest you borrowed for the first year. So compound interest is paying interest on interest.

Borrow $10,000 @ 10% interest to be paid back at the end of 10 years with no payments until then:

Owed Owed

Year first of year Interest end of year

1 $10,000 $1,000 $11,000

2 11,000 1,**100** 12,**100** (You paid interest on the interest)

3 12,100 1,**210 13,310 **(Notice interest is accelerating)

10 23,580 2,358 25,938

Your interest compounds and your trouble compounds.

Einstein called compounding the 8th Wonder - it can work for you, or against you. When you invest it works for you. When you borrow it works against you! He is also quoting as saying compounding is the most powerful force in the universe.

Total Total

Year first of year Interest end of year

1 $10,000 $1,000 $11,000

2 11,000 1,**100** 12,**100** (You earned interest on the interest)

3 12,100 1,**210 13,310 **(Notice interest is accelerating)

10 23,580 2,358 25,938 2.6 times more than $10,000

20 67,275 6.7 times more

30 174,494 17.4 times more

Notice that the 30 year total is **6.7** times the 10 year total, even though 30 years is only **3** times 10 years! That's compounding (or accelerating!).

Use a calculator that includes financial functions, financial calculator on a site or simply use a table: Tables Growth Calculator Online Mortgage Calculator

Deeper explanation at wikipedia.

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