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

What term refers to a fee charged by creditors for lending money or extending credit?

1. Interest

2. Dividend

3. Principal

4. Commission

The correct answer is: Interest

The term that refers to a fee charged by creditors for lending money or extending credit is "interest." Interest represents the cost of borrowing money, expressed as a percentage of the principal, which is the amount of money borrowed. Creditors charge interest to compensate for the risk of lending and to make a profit. This fee can be calculated in various ways, such as simple interest or compound interest, and is typically detailed in loan agreements or credit contracts. Other options present different financial concepts that don't apply in this context. A dividend is a payment made to shareholders from a corporation's profits, not a fee for borrowing. The principal refers to the initial sum of money borrowed or invested, whereas a commission is a fee paid to an agent for facilitating a transaction, which is unrelated to the borrowing or lending of money. By understanding interest as the fee charged for lending, one can better grasp the fundamental principles of credit and finance.