Compoun interest is the concept of adding accumulated interest back to the principal, so that interest is earned on interest from that moment on. The act of declaring interest to be principal is called compounding (i.e. interest is compounded). A loan, for example, may have its interest compounded every month: in this case, a loan with $1000 principal and 1% interest per month would have a balance of $1010 at the end of the first month.