What is defined as the cost of borrowing money?

The cost of borrowing money is best defined as the interest rate. This is the percentage of the principal amount that a lender charges the borrower for the use of the money. The interest rate reflects the time value of money and encompasses the risk associated with lending. It determines how much the borrower will need to pay back in addition to the original amount borrowed (the principal).

When looking more closely at the context of the other terms, the principal refers to the original sum of money borrowed or invested, but it does not account for the cost incurred while borrowing that sum. Collateral pertains to an asset pledged by the borrower to secure the loan, which serves to protect the lender but does not represent a cost itself. The loan amount is simply the total amount being borrowed and also does not include additional costs related to interest.

In summary, the interest rate is the measure that quantifies the cost of borrowing, making it the correct response to the question.