Interest is the amount of money you have to pay back over and above the principal amount borrowed. This is the way through which lenders make a profit.

Compund interest is as a result of reinvesting interest, rather than paying it out, so that interest in the next period is then earned on the principal sum plus previously accumulated interest.

**Formula to calculate compound interest.**

- A = the future loan, including interest.
- P = the principal investment amount.
- r = the annual interest rate (decimal).
- n = the number of times that interest is compounded.
- t = the time the money is invested or borrowed for

**Example:**

If an amount of $ 7,000 is deposited into a savings account at an annual interest rate of 5%, compounded monthly, calculate the compound interest after 3 years.

If we want to calculate the interest alone, we subtract the principal from the amount.

Therefore, the compounded interest at the end of 3 years will be $ 1,1130.31.