How compound interest works on a loan
With compound interest, interest is added to the balance at regular intervals, and the next interest charge is worked out on that bigger balance. Over time you pay interest on interest, so an unpaid balance grows faster each year.
This applies when nothing is being repaid: for example a loan with a payment holiday, a deferred or rolled-up loan, or a loan repaid in one lump sum at the end. The calculator assumes no repayments at all during the time period.
Most ordinary repayment loans work differently. Your monthly payments cover the interest and pay off some of the balance, so interest is charged on a falling balance. To see the cost of a loan you're repaying, use the loan interest calculator instead.
Worked example
Borrowing £10,000 at 7% a year, compounded monthly, with nothing repaid for 5 years, you'd owe £14,176.25 at the end. That's £4,176.25 of interest, and a balance 1.42 times the amount you borrowed.
How often interest compounds makes a small difference. Over the same 5 years, compounding daily gives £14,190.20, quarterly £14,147.78 and annually £14,025.52.
How the calculation works
The annual rate is divided by the number of compounding periods in a year, and the balance is projected month by month at the equivalent monthly rate. The more often interest compounds, the higher the balance at the end.
Lenders may describe and apply interest in different ways, so check your loan agreement for the rate and how often interest is added.
Inputs for the compound interest loan calculator
Amount borrowed
The balance you start with, such as the amount you borrowed or the amount you owe now.
Annual interest rate
The yearly interest rate on the loan. The rate shown is only an example, so enter the rate from your loan agreement.
Time period
How many whole years the balance builds up with nothing repaid.
Interest compounds
How often interest is added to the balance: daily, monthly, quarterly or annually. Check your loan agreement if you're not sure.
CALCULATOR QUESTIONS
Compound interest loan calculator questions
How much will I owe if I don't repay a loan?
It depends on the rate, how often interest compounds and how long you leave it. £10,000 at 7% compounded monthly grows to £14,176.25 after 5 years.
What's the difference between compound and simple interest?
Simple interest is charged only on the original amount. Compound interest is also charged on interest already added, so the balance grows faster.
Do normal loans charge compound interest?
Interest on most repayment loans is charged on the outstanding balance, which falls as you repay. Compounding only builds up a balance when payments are missed, paused or deferred.
Does more frequent compounding cost more?
Yes, slightly. At the same annual rate, interest compounded daily grows a balance a little faster than interest compounded monthly or annually.