The interest on a loan or other fixed-income instrument where interest previously paid is included in the calculation of future interest. For example, if one has a loan of EUR 1,000 on a simple interest rate of 12% (giving a monthly simple interest rate of 1%), after a month, the interest owed is 1% of EUR 1,000, which is EUR 10, making the outstanding balance EUR 1,010. The next month, the 1% would be charged on that EUR 1,010, adding EUR 10.10 to the balance to make it EUR 1,020.10. This incremental increase continues each month, meaning that by the end of the year, the balance is EUR 1,126.83.
