Rate of interest (R) is

• A. The percentage of a loan paid as interest in a year
• B. The total interest paid over the life of the loan
• C. The monthly payment amount
• D. The principal balance at year end

Answer: (A)

The rate of interest is the annual cost of borrowing expressed as a percentage of the loan principal. It tells you how much interest the loan costs each year. For example, with a 6% annual rate on a $100,000 loan, about $6,000 would be charged as interest in one year (before any effects of compounding or amortization). When payments are made monthly, interest is computed on the outstanding balance, but the rate itself remains an annual figure. This distinguishes it from the total interest paid over the life of the loan, which depends on term and amortization; from the monthly payment, which includes both interest and principal; and from the principal balance at year end, which is the amount owed, not the cost of borrowing.