Compound interest

Definition

Compound interest is a concept in finance that refers to the interest earned or charged on both the initial principal amount and the accumulated interest from previous periods.

What is compound interest?

It is interest calculated on the initial amount of money invested or borrowed, as well as on the interest accumulated over time. This compounding effect can significantly boost savings or debt obligations over time.

Compound interest has a snowball effect, where the interest earned or charged in each period is added to the principal, resulting in a larger base for calculating future interest. Over time, this compounding effect accelerates the growth of investments or debts. 

Compound interest is a powerful tool for wealth accumulation over the long term. By reinvesting earnings and allowing them to compound over time, investors can achieve significant growth in their investment portfolios. On the other side, compound interest can work against borrowers, causing debts to grow rapidly if left unpaid. Credit cards, mortgages, and other loans with compound interest accrue interest on the outstanding balance, including both the principal and any accrued interest. Failure to make timely payments can lead to a cycle of increasing debt due to the compounding effect.

Example of compound interest

Let’s say a company invests R50,000 in a high-yield bond with an annual interest rate of 6%, compounded annually, to finance a new project.

In the first year, the company earns 6% interest on its initial investment of R50,000, amounting to R3,000. So, at the end of the first year, the value of the investment grows to R50,000 + R3,000 = R53,000.

In the second year, the company earns 6% interest on the new balance of R53,000, which amounts to R3,180. So, at the end of the second year, the investment grows to R53,000 + R3,180 = R56,180.

This process continues, with the interest being compounded annually on the new balance. Over time, the investment grows exponentially, allowing the company to accumulate wealth and potentially fund future projects or expansions.

Ready to grow your business?

Clever finance tips and the latest news

Delivered to your inbox monthly

Join the 95,000+ businesses just like yours getting the Swoop newsletter.

Free. No spam. Opt out whenever you like.

Our offices:

Disclaimer: Swoop Finance helps South African firms access business finance, working directly with businesses and their trusted advisors. We are a credit broker and do not provide loans or other finance products ourselves. We can introduce you to a panel of lenders, equity funds and grant agencies. Whichever lender you choose we may receive commission from them (either a fixed fee of fixed % of the amount you receive) and different lenders pay different rates. For certain lenders, we do have influence over the interest rate, and this can impact the amount you pay under the agreement. All finance and quotes are subject to status and income. Applicants must be aged 18 and over and terms and conditions apply. Guarantees and Indemnities may be required. Swoop Finance can introduce applicants to a number of providers based on the applicants’ circumstances and creditworthiness. Swoop Finance (Pty) Ltd is registered with CIPC in South Africa (company number 2023/820661/07, registered address 21 Dreyer Street, Cape Town, South Africa, 7708).

© Swoop 2025

Looks like you're in . Go to our site to find relevant products for your country. Go to Swoop