Which statement defines the cost of money borrowed?

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Prepare yourself for the GFL Financial Literacy Test. Study with flashcards and multiple choice questions. Each question comes with helpful hints and thorough explanations to aid retention. Get ready for your exam and achieve success!

Multiple Choice

Which statement defines the cost of money borrowed?

Explanation:
Interest is the price charged for using someone else’s money. When you borrow, you pay interest as a percentage of the principal for each period, and this is how lenders are compensated for lending funds. Simple interest calculates that charge only on the original amount borrowed, while compound interest adds interest to the balance so future interest is charged on a larger amount. Return on investment describes profits from investing, not the cost of borrowing. So the term that defines the cost of money borrowed is interest.

Interest is the price charged for using someone else’s money. When you borrow, you pay interest as a percentage of the principal for each period, and this is how lenders are compensated for lending funds. Simple interest calculates that charge only on the original amount borrowed, while compound interest adds interest to the balance so future interest is charged on a larger amount. Return on investment describes profits from investing, not the cost of borrowing. So the term that defines the cost of money borrowed is interest.

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