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Compound Interest
Plain English
Interest calculated on both the original amount and the interest that's already been added — growth on growth.
Professional definition
Interest computed on the initial principal and on accumulated interest from prior periods, causing balances to grow at an increasing rate over time relative to simple interest.
Example
$1,000 at 5% compounded annually grows to $1,050 after year one, then $1,102.50 after year two (5% of $1,050, not just $1,000).
Common misconception
Compound interest benefits savers and investors, but it also works against borrowers — compounding debt can grow faster than expected if only minimum payments are made.