Question

Why is interest typically paid on a loan? A. to compensate the borrower for borrowing from a specific lender B. to ensure that people do not borrow money without having a good reason C. to compensate the lender for the risk that the loan will not be repaid D. to compensate the lender for temporarily making do without the money that was lent

Answer 1

Answer:

The correct answer is option D.

Explanation:

An interest rate is an amount charged by a lender on the use of assets. It is expressed as a percentage of the principal. The interest rate is the return on lending for a lender and the cost of borrowing for the borrower.  

Interest is typically paid on a loan to compensate for the opportunity cost of lending money. A lender could invest the money instead of lending and get a higher return from it.  

To compensate for not using the money for an alternative purpose or for temporarily making do without the money that was lent, the borrower pays a certain percentage of principal to the lender.