What Is Compound Interest?
Compound interest explained simply: how earning interest on your interest makes savings grow — and debts balloon — over time.
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Frequently asked questions
What is compound interest in simple terms?
Interest earned on your principal and on the interest already added, so your balance grows on an accelerating curve.
Why is it called "interest on interest"?
Because each period’s interest is calculated on a balance that already includes prior interest, not just the original principal.
What is the snowball effect?
As the balance grows, each period’s interest grows too, so the total builds faster and faster over time.
Why does starting early matter so much?
More time means more compounding periods, so early contributions have longer to multiply — often beating larger late investments.
Does compound interest apply to debt?
Yes. On credit cards and some loans it works against you, growing what you owe if balances are not cleared.
What affects how much it grows?
Mainly the interest rate, how often it compounds, and — most powerfully — the length of time invested.
Understanding compound interest
Compound interest is interest earned on both your original money and the interest it has already earned. Each period the interest is added to the balance, and the next period’s interest is calculated on that larger amount — "interest on interest".
The snowball effect
Because the balance keeps growing, the interest added grows too, creating an accelerating snowball. In early years the effect is modest, but over decades it can become the largest part of a pot, dwarfing the original deposits.
A simple illustration
£1,000 earning 7% a year roughly doubles in about 10 years, then doubles again to around £4,000 in another decade. The second doubling adds far more pounds than the first, even though the rate is unchanged — that is compounding at work.
Two levers make it powerful: time and rate. Starting early gives interest more periods to build on itself, which is why regular saving from a young age tends to outperform larger sums invested later.
Results are estimates for general guidance in United Kingdom and may not reflect the latest local rates, fees or rules. Check official sources before making decisions.