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

The term that describes the cost of borrowing money is "interest." When an individual or organization borrows money, the lender charges a fee for the service, which is expressed as a percentage of the principal amount borrowed. This fee is called interest and is typically paid over the duration of the loan, either periodically or at the end of the loan term.

Understanding interest is crucial as it directly impacts the total amount that must be repaid in addition to the principal, and it reflects the risk to the lender for providing the loan. Interest rates can vary depending on various factors, including the borrower's creditworthiness, the loan amount, and prevailing economic conditions.

Terms like principal, capital, and yield relate to finance as well, but they do not specifically refer to the cost of borrowing. The principal is the original sum of money borrowed or invested, capital generally refers to wealth or resources employed to produce further wealth, and yield is typically associated with returns on investments. Each of these terms holds significance in financial transactions, but only interest pertains directly to the cost incurred when borrowing money.