The percentage by which the money the borrower pays back exceeds the money that was borrowed is called as
Nominal interest rate
Understanding How Borrowing Costs Work
When you borrow money, you don't just pay back the original amount you borrowed. You also pay an extra amount for the privilege of using the money. This extra amount is usually expressed as a percentage of the borrowed amount over a specific period, like a year. The question asks for the name of the percentage by which the total money paid back is more than the initial money borrowed. Let's look at the options to find the right term.
Analyzing the Options
Let's break down each term provided in the options:
- Bank rate: This is the interest rate at which a central bank lends money to commercial banks. It's a policy tool used by central banks to control credit availability and inflation. It's not the rate a regular borrower pays on a personal loan or mortgage directly.
- Nominal interest rate: This is the stated or advertised interest rate on a loan or investment. It represents the percentage increase in the amount of money you owe (as a borrower) or earn (as an investor) over the original amount, before considering the effects of inflation. If you borrow \$100 at a 10% nominal interest rate per year, you will pay back \$110 (plus potentially fees, but the interest itself is \$10, which is 10% of \$100). This directly matches the description in the question: the percentage by which the money paid back exceeds the money borrowed.
- Real interest rate: This rate adjusts the nominal interest rate for inflation. It reflects the change in the purchasing power of the money. If the nominal rate is 10% and inflation is 3%, the real interest rate is approximately 7%. The question asks about the percentage increase in the *money* amount, not its purchasing power, so this term is not the correct fit.
- Terms of credit: This is a broader concept that includes all the conditions associated with a loan or credit agreement. This includes the interest rate, but also the loan amount, repayment schedule, length of the loan, fees, collateral requirements, and other conditions. It's the overall agreement, not just the specific percentage asked about.
Identifying the Correct Term
Based on the analysis, the term that specifically describes the percentage by which the money the borrower pays back exceeds the money that was borrowed is the Nominal interest rate. This is the rate that is usually quoted and agreed upon when taking out a loan.
Let's visualize this simple concept:
\(\text{Total Money Paid Back} = \text{Money Borrowed} + \text{Interest Paid}\)
The question asks for the percentage:
\(\text{Percentage Excess} = \left( \frac{\text{Interest Paid}}{\text{Money Borrowed}} \right) \times 100\)
This percentage is precisely what the nominal interest rate represents.
Revision Table: Key Financial Rates
| Term | Definition | What it measures |
|---|---|---|
| Nominal Interest Rate | The stated interest rate on a loan or investment. | Percentage increase in the money amount paid back over the money borrowed. |
| Real Interest Rate | Nominal interest rate adjusted for inflation. | Percentage increase in the purchasing power of the money paid back over the money borrowed. |
| Bank Rate | Rate at which the central bank lends to commercial banks. | Cost of borrowing for commercial banks from the central bank. |
| Terms of Credit | Full conditions of a credit agreement. | All aspects of a loan including rate, repayment schedule, fees, etc. |
Additional Information on Interest Rates
Understanding the difference between nominal and real interest rates is important, especially during times of inflation. While the nominal rate tells you how much more money you will pay back, the real rate tells you the true cost of borrowing in terms of purchasing power. If inflation is high, a nominal rate might seem high, but the real rate could be low or even negative, meaning the money you pay back is worth less in real terms than the money you borrowed.
Most loans are quoted with their nominal interest rate. Borrowers should also be aware of the Annual Percentage Rate (APR), which includes the nominal interest rate plus certain fees, giving a more complete picture of the annual cost of borrowing.
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