The Italian term “anatocismo” refers to interest being calculated not only on the principal originally loaned, but also on the interest related to previous periods.
The term “anatocismo” comes from the Latin word “anatocisum”, which in turn derives from the ancient Greek word composed of “ana” (above) and “toko” (product), which comes from the verb “tirko” (to produce).
Based on this concept, at the end of each period, (known as “capitalisation period”, or “rest”) interest is added to the original loaned amount. Interest accrued in a specific period contributes to increasing the overall debt, by producing additional interest for the following period. To put it simple, we could describe it as “interest on interest”. Over the years, this phenomenon has become so central in the banking sector, as to lead to pervasive litigation between banking institutions and their customers.
In Italy “anatocismo” is governed by the Civil Code and individual laws targeting banks and financial intermediaries. In accordance with Article 1283 of the Italian Civil Code, the interest due cannot be increased by additional interest. Interest is calculated, from time to time, on the principal amount due, provided that the principal cannot include future interest, or interest for delay. Consequently, as recently confirmed by the Court of Cassation, as a general rule, any contractual provision involving the application of “anatocismo” is invalid.
The concept can be easily translated in Latin languages, which have resorted to words of the same Latin origin (anatocisme in French, and anatocismo in Spanish). The German word commonly used to describe the same concept is zinseszinsen (which literally translates as “interest on interest”). The concept seems to also apply in common law countries, where the expression most commonly used is “compound interest”, which is definitely easier to read, and more common, than using “anatocism” as a Latin loanword.