What is the term used to describe the rate that is applied to the cost of borrowing money?

The interest rate is the term that specifically refers to the percentage applied to the principal amount borrowed, indicating the cost of borrowing money over a specified period. It plays a crucial role in financial agreements, such as mortgages and loans, as it determines how much the borrower will pay in addition to the original amount borrowed.

For example, if someone takes out a loan of $1,000 with an interest rate of 5% per year, they would owe $50 in interest for that year. The interest rate is a key element in calculating monthly payments, total cost of the loan, and understanding the overall financial commitment.

In the context of other terms, while a fixed rate refers to an interest rate that remains constant over the life of a loan, the APR (Annual Percentage Rate) encompasses the total cost of borrowing, including interest and any additional fees, rather than just the nominal interest charged. The discount rate is a different concept, often relating to the rate used in financial modeling to determine the present value of cash flows and is not directly applied to individual loans or mortgages.