Simple and Compound Interest: Definition of Terms

Lender or creditor

Person (or institution) that invests the money or makes the funds available.

Borrower or debtor

Person (or institution) who owes the money or avails of the funds from the lender.

Origin or Loan Date

Date on which money is received by the borrower.

Repayment date/Maturity Date

Date on which the money is borrowed or loan is to be completely repaid.

Time or term (t)

Amount of time in years the money is borrowed or invested; length of time between the origin and maturity dates.

Principal (P)

Amount of money borrowed or invested on the original date.

Rate (r)

Annual rate, usually in percent, charged by the lender, or rate of increase of the investment.

Interest (I)

It is the amount that is charged for the privilege of borrowing money.

Simple Interest

Interest that is computed on the principal and then added to it. The interest remains constant throughout the term.

Compound Interest

Interest is computed on the principal and also on the accumulated past interests.

Maturity value or Future value

Amount after t years that the lender receives from the borrower on the maturity date.