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The concept of "compounding" refers to the dynamic of an investments ability to grow over time.

This relates to both investments and consumer loans such as a credit card, auto loan and home loans.

Compound interest is interest that is added to the initial principal of an investment or loan, thereby increasing the balance and, in turn, increasing the amount of interest earned or paid in the next period.

The power of compounding helps a sum of money grow faster than if just simple interest were calculated on the principal alone. The greater the number of compounding periods, the greater the compound interest growth will be. For savings and investments, compound interest is your friend, as it multiplies your money at an accelerated rate. But if you have debt, compounding interest can make it increasingly difficult to pay off.