The interest rate per annum (p.a.) is the annual cost of borrowing expressed as a percentage of the outstanding loan principal. For a US$10 million loan at 12% p.a., the borrower pays US$1.2 million in annual interest (before considering amortisation). Interest may be paid monthly, quarterly, semi-annually, or capitalised (PIK — payment-in-kind) depending on the loan structure.
In private credit markets, interest rates on direct lending instruments are typically higher than bank loan rates to compensate for illiquidity and credit risk. Rates are often structured as a base rate (e.g. SOFR or a central bank reference rate) plus a credit spread. Fixed-rate instruments lock in the coupon for the life of the loan; floating-rate instruments adjust as reference rates change.