What is interest on a loan?

• A. The amount borrowed
• B. The extra money paid back as a percentage
• C. A fee paid only at loan origination
• D. A discount

Answer: (C)

Interest on a loan is the cost of using someone else’s money. It’s the extra amount you pay back on top of what you borrowed, usually shown as a percentage of the loan amount each year. For example, borrowing $1,000 at a 5% annual interest rate means you’d owe $50 in interest after one year, so the total would be $1,050. Interest builds up over time and is charged during the life of the loan, not just at the start. An origination fee is a separate upfront charge, not the interest itself. So the description that says it’s the extra money paid back as a percentage is the best way to understand what interest is.