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

Why is a finance charge important to consumers?

1. It represents the total price of purchased goods

2. It indicates the cost of borrowing money

3. It outlines the schedule for bill payments

4. It reveals the penalties for late payments

The correct answer is: It indicates the cost of borrowing money

A finance charge is important to consumers because it reflects the cost of borrowing money. When individuals take out loans or use credit, they often incur additional costs beyond just the principal amount borrowed. These costs include interest and other fees that make up the finance charge. Understanding the finance charge helps consumers assess how much they will actually pay over time for using credit. It provides insight into the total expense of borrowing, allowing consumers to make informed financial decisions when comparing credit offers. Knowing the finance charge enables consumers to understand the implications of their borrowing, including how interest rates can affect the total amount repaid. While other choices mention important aspects of financial transactions, they do not capture the essence of why the finance charge is particularly significant. For instance, the total price of purchased goods does not necessarily communicate costs associated with borrowing; a payment schedule is critical for managing cash flow but does not detail costs; and penalties for late payments are important to consider, but they are separate from the fundamental cost of borrowing itself.