Compound interest is the interest that is paid on the original principle of a loan and the unpaid interest that has accrued. As an example, consider the purchase of a new home with a mortgage that is designed to be paid out over 30 years. You have just found your dream property. Now, you have to find a lender who is willing to give you the amount of mortgage that you need. Instead of taking the first offer, you make the financially sound decision and shop around. You see that most lenders charge a premium for their services, and you are going to have to pay interest on your new home. The interest that you pay adds up over the life of the mortgage, and you end up paying interest on the original interest. This is known in the industry as compound interest because it adds to the original principal and the interest.