Compound interest (renters rente)
Also known as interest on interest, capitalisation of interest
Compound interest is interest charged on interest that has already accrued — and it cannot be claimed on a monetary claim without an agreement made afterwards.
- General rule
- Cannot be claimed
- Calculated on
- The principal alone
- Requires
- An agreement made after the interest fell due
In practice
Interest runs on the principal. Not on the principal plus the interest already added to it. It sounds like a detail, but on a claim outstanding for several years the difference is real — and it is the creditor who loses on it if the arithmetic is wrong.
The exception is narrow. The parties may agree to compound interest, but the agreement has to be made after the interest has fallen due. A clause written into the terms of trade long before the claim arose does not reach it.
In practice this means the claim must be stated with principal and interest kept apart, and the interest calculated on the same base figure throughout.
Where it commonly goes wrong
- Interest is rolled into the principal at year end. From New Year onwards there is then interest on interest, and the statement cannot be defended.
- Pointing to the terms of trade. They were agreed before the interest fell due and therefore give no right to compound it.