What is the price paid for the use of borrowed money?

• A. Interest
• B. Closing Costs
• C. Bankruptcy
• D. Credit Score

Answer: (A)

Interest is the price paid for using someone else’s money. When you borrow, you’re paying for the lender’s funds over time, which compensates them for lending and for the risk they take. The amount of interest depends on the amount borrowed (the principal), the interest rate, and the time the money is borrowed. For example, borrowing $1,000 at 5% annual interest for one year costs about $50 in interest; with compounding, the cost can grow as interest accrues on the balance. Other loan-related costs aren’t the price of using the money itself: closing costs are upfront fees to obtain the loan, bankruptcy is a legal process related to debt, and a credit score is a rating that can influence the terms of borrowing but is not the charge for using the money.