When interest is earned by a lender on a loan, but not paid by the borrower, it is added to the amount owed.
This is accrued interest. Or sometimes labelled as deferred interest.
For example, when a monthly mortgage payment for $1,000 is due and only $900 is paid by the borrower, the shortage of $100 will be added to the amount owed.
This is without accounting for penalty fees that might be charged to the borrower.
These scenarios happen on almost every type of credit facility offered by lenders.
When such events happen on a mortgage, it is commonly referred to as negative amortization.
Interest might be charge on the amount owed, making it an interest-on-interest cost to the borrower.
Compounding interest is good for investors when they are the one benefiting from it. Being the party paying for it is going to hurt.
The period in which interest due is calculated is called the interest accrual period.
For yearly interest, the period would be 1. A monthly mortgage would have a period of 12. A biweekly mortgage would have a period of 52. And so on.
It must be noted that the interest accrual period does not necessarily match the payment period.
For example, a loan might have a monthly accrual period buy payment is made biweekly.