Compound Interest Guide
Compound Interest and Debt
See how compounding can work against borrowers when unpaid interest is added to a debt balance.
This article is for educational purposes only. It does not provide financial, investment, tax, or legal advice. Read the full Financial Disclaimer.
Compounding is not always good
For savers, compounding can help money grow. For borrowers, compounding can make debt grow if unpaid interest is added to the balance.
This is why high-interest debt can become difficult to manage.
Interest on interest
If interest is not paid, it may be capitalized or added to the amount owed. Future interest can then be calculated on a larger balance.
The same snowball effect that helps savings can hurt borrowers.
Paying down debt changes the math
Extra payments can reduce the balance that future interest is calculated on. This may lower total interest costs over time.
Debt calculations can have special rules, so use debt-specific calculators when planning repayment.