What is referred to as the nominal interest rate?

The concept of the nominal interest rate pertains to the actual interest rate that borrowers pay when they engage in loans or borrow funds. This rate reflects the monetary cost of borrowing and is expressed in current dollars without accounting for changes in purchasing power due to inflation. In other words, the nominal interest rate represents the return that lenders earn and the cost that borrowers incur, strictly based on the terms set out in lending agreements.

In contrast, some other concepts related to interest rates deal with variations based on inflation or government regulation, such as real interest rates, which adjust the nominal rate to account for inflation effects. The average interest rate across all loans is more of a statistical measure rather than a definition of nominal interest. While there may be interest rate ceilings or floors established by the government, the nominal interest rate itself is determined primarily by the market and not directly regulated.

Therefore, defining the nominal interest rate as the actual interest rate paid by borrowers captures its essence as a straightforward metric for analyzing lending cost, reflecting the deal struck between lenders and borrowers in today's economic conditions.