What is defined as the interest charged to a borrower for the use of credit?

What is defined as the interest charged to a borrower for the use of credit?

• A. Principal
• B. Finance charge
• C. Market rate
• D. Collateral

Answer: (B)

The correct answer, which is the finance charge, is the term used to refer to the total costs a borrower incurs for using credit. This includes not only the interest on the loan itself but can also encompass fees and other costs associated with borrowing. The finance charge is expressed as a dollar amount or as a percentage rate, helping borrowers understand the full expense of taking on debt. The other choices do not represent the interest charged for the use of credit. Principal refers to the original amount of money borrowed, which does not include any interest or fees related to the loan. Market rate pertains to the prevailing interest rates in the broader economy, which can influence but does not define the specific charges incurred by an individual borrower. Collateral is an asset pledged by the borrower to secure a loan, which serves as protection for the lender rather than a measure of the cost of credit itself.

The correct answer, which is the finance charge, is the term used to refer to the total costs a borrower incurs for using credit. This includes not only the interest on the loan itself but can also encompass fees and other costs associated with borrowing. The finance charge is expressed as a dollar amount or as a percentage rate, helping borrowers understand the full expense of taking on debt.

The other choices do not represent the interest charged for the use of credit. Principal refers to the original amount of money borrowed, which does not include any interest or fees related to the loan. Market rate pertains to the prevailing interest rates in the broader economy, which can influence but does not define the specific charges incurred by an individual borrower. Collateral is an asset pledged by the borrower to secure a loan, which serves as protection for the lender rather than a measure of the cost of credit itself.