Which of the following best describes compound interest?

Compound interest is best described as interest calculated on the total amount that includes both the initial principal and any accumulated interest from previous periods. This means that as interest accrues, it becomes part of the principal for future calculations, leading to a situation where interest is earned on interest.

In contrast, interest calculated solely on the loan amount refers to simple interest, where the interest does not take prior interest into account, only the original principal. A fixed interest rate over the life of the loan indicates that the interest does not change, which is not specific to the concept of compound interest. Lastly, interest that is paid only at the beginning of the loan term does not reflect how compound interest operates, as it typically involves ongoing calculations throughout the life of the loan.

Understanding compound interest is crucial in areas such as loans and investments, as it greatly affects the total amount paid or earned over time.