Compound interest is generally referred to as interest on interest based on the way that it is calculated over a period of time. It is always in one’s best interest to have a savings account with interest that is compounded daily or monthly.
However, when borrowing money in the form of a loan and repaying it with interest that is compounded, this may not be in one’s best interest. The same is true when paying back credit cards with high interest rates compounded monthly. Here is an example in the video:
Sometimes borrowers are confused with the difference between simple interest and compound interest. On a simple interest loan, the borrower is paying back the interest rate on the principal balance of the loan over a period of time.
But with compound interest, the borrower is paying back the interest on the principal balance of the loan and paying interest on the interest that is accrued over a certain period of time.
If at all possible, it is great to be the lender and not the borrower.