The Enduring Popularity of Compound Interest

Personal finance is a very popular area of financial services. There are numerous products and services available including equity release, which enable consumers to raise funds for a particular purchase, planning for the future or supplementing their lifestyle. The financial service industry is filled with service providers including accountants, brokers and financial advisers who are able to facilitate this type of finance. 

These products are regulated by the Financial Services Authority and designed to be beneficial through the use of compound interest. Compound interest is commonly used in a number of financial products from savings accounts through to equity release schemes, so it is important to understand the implications compound interest will have on your particular financial arrangement. An online compound interest calculator can be the easiest way to work this out.

What Exactly is Compound Interest?

Compound interest is an arrangement whereby the interest is added on to the main principle of a loan or deposit. Once the interest is added, the balance will increase and attract further interest. Compound interest is especially popular with savings bonds where no withdrawals are permitted leaving the interest to compound and increase the balance significantly. Compound interest is also one of the popular features of equity release schemes. These schemes are designed for the over fifty-fives and are similar to conventional mortgages but they require no monthly repayments. Instead the interest for the loan compounds on to the loan balance. The entire balance is only due for repayment when the home owner has died and their property is then sold. 

Compound interest can be a little complex to calculate. It is usually compounded annually, so the first year is fairly simple to work out. However, as the years pass by, more and more interest is compounded, so it can be difficult to work out. Many people use an online compound interest calculator, which has been pre-programmed to show the financial implications of using this popular method of interest. 

Benefits of an Online Compound Interest Calculator

With any financial product which uses compound interest, your broker or financial adviser will provide a key facts document which illustrates how the compound interest will affect the balance over the years of the arrangement. However, an online compound interest calculator can provide a number of benefits for consumers. These include:

• Taking control: Even if you use professional service providers such as accountants and financial advisers, it is a good idea to take control of your financial products and statements to check whether you are happy with them. An online compound interest calculator can provide the opportunity to assess your potential financial product such as equity release and see the impact the compound interest would have at different rates on the balance. It is only by fully understanding these effects will you be able to make an informed decision about whether the product is right for you.

• Evaluate trends: An online compound interest calculator can also be useful in evaluating trends in your portfolio. You will be able to see how the interest rates are moving and how this will affect your current investments or borrowing. This will enable you to have a greater degree of protection for your portfolio and ensure that you have maximum liquidity in the future.

• Assess your estate: With certain financial products such as equity release, compound interest can have an impact on the amount of funds which would be available for your estate. By using an online calculator, you will be able to see the potential impact a scheme will have on your estate and enable you to perform more optimised inheritance planning. This can minimise the amount of inheritance tax which would need to be paid in the event of your death by your beneficiaries. 

Compound interest is an extremely popular feature of a number of financial products and services. It is essential that you understand the concept and how it can affect the balance of your savings or loans. Those with little understanding of compound interest may see schemes such as equity release as overly expensive; but it is only with understanding of the concept of compound interest can you truly appreciate the advantages and disadvantages of the product. An online compound interest calculator can prove a useful tool for this. There is no need to be a maths genius, you simply enter in the basic details of the product and the calculator will produce details for the effects of compound interest year on year. This will help you to have all the information necessary to proceed forward with a financial product in confidence that it is the right choice for you.