Future Business Leaders of America (FBLA) Business Law Practice Exam

What is a finance charge?

1. The interest on unpaid bills

2. The cost of the loan in dollars and cents

3. The fee for late payments

4. The penalty for early loan repayment

The correct answer is: The cost of the loan in dollars and cents

A finance charge is the cost of borrowing money or extending credit, expressed in monetary terms. It encompasses all the fees and interest that a borrower incurs when taking out a loan or using a credit service. This charge is typically calculated based on the outstanding balance and the interest rate agreed upon in the loan terms. Choosing the option that states the finance charge is "the cost of the loan in dollars and cents" accurately captures this understanding, as it quantifies the borrowing costs involved in a straightforward manner. In contrast, while the interest on unpaid bills may contribute to the finance charge, it does not represent the entire scope of costs associated with financing—thus, it is a narrower definition. Similarly, fees for late payments or penalties for early repayments are specific types of charges that may apply but do not encompass the overall definition of a finance charge, which covers all costs related to borrowing.