I actually have a problem with this verse because it's technically a contradiction. If you read the next verses, it states unbelievers will burn in hell. Surely that is compulsion in religion? That's like saying "I won't force you to convert but you will later burn in hell". This applies to most religions, not just Islam. If there is an explanation to this then I'd like to hear it because I may be wrong about this.
Not exactly, if a person lacks faith, unless he keeps an open mind he will still lack faith, despite how many warnings that person gets. It's the same thing with criminals, they know the crimes they commit will result in punishment, but they do it anyway, right? Compulsion refers to making someone profess their faith even when they don't believe it with their hearts. If I were to hold a gun to your head and tell you to declare that you believe in Islam, that would be compulsion which is forbidden, considering that the person will still not believe in it inside, despite saying they do.