What is Interest?

• A. Money paid for the privilege of borrowing money.
• B. Money earned from investments
• C. A fee charged for account maintenance
• D. A penalty for early withdrawal

Answer: (A)

Interest is the cost you pay to borrow money. It represents the lender’s compensation for letting someone use their funds, reflecting both the time value of money and the risk involved. The amount is typically a percentage of the loan’s principal and can be calculated simply (on the original amount) or compoundingly (on the principal plus accumulated interest). For example, borrowing $1,000 at 5% interest for one year would add $50 in interest, assuming simple interest.

This definition matches the idea of interest as the price of borrowing money. Other descriptions point to different concepts: money earned from investments refers to returns to the investor, a maintenance fee is a service charge, and a penalty for early withdrawal is a penalty.