What is a simple loan interest rate?

• A. The total amount of money borrowed.
• B. The period over which the loan is repaid.
• C. The percentage fee charged on a loan, used to calculate interest.
• D. The penalties for late payments.

Answer: (C)

The main idea is that a simple loan interest rate is the percentage of the loan that you pay as interest. This percentage is applied to the amount you borrowed (the principal) to determine how much interest you owe over a period. For example, borrowing $1,000 at 5% interest per year means $50 in interest for that year, so you would repay $1,050 after one year. The rate, not the amount borrowed or the loan term or any late fees, sets how expensive the borrowing is. The amount borrowed is called the principal, the period you repay is the term, and penalties are separate charges for late payments.