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Claiming interest—compound interest
Published by a LexisNexis Dispute Resolution expert
Practice notesClaiming interest—compound interest
Published by a LexisNexis Dispute Resolution expert
Practice notesThis Practice Note on compound interest identifies the legal principles involved when seeking to claim compound interest, rather than simple interest, in respect of your claim.
For guidance on claiming interest generally (the default position being to claim simple interest), see Practice Note: Claiming interest.
The difference between simple and compound interest
The difference between the two calculations of interest is as follows:
- •
simple interest: the interest is calculated on the principal amount
- •
compound interest: the interest is calculated on the principal amount plus the interest that accumulates on it in every (certain prescribed) period (or ‘rests’)
By way of illustration (although for simplicity, only annual ‘rests’ are used, which do not show as marked a contrast between simple and compound interest, as more regular ‘rests’ would do):
Simple interest | Compound interest, with annual rests | |
Year 1 | 5% x £10,000 = £500 | 5% x £10,000 = £10,500 |
Year 2 | 5% x £10,000 = £500 | 5% x £10,500 = £10,500 + £525 |
Year 3 | 5% x £10,000 = £500 | 5% x £11,025 = £11,025 + £552 |
Year |
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Practice notes 4
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