Future Business Leaders of America (FBLA) Business Calculations Practice Test

What is the term used for the amount of finance charge based on the unpaid balance of a loan?

1. total equity

2. principal

3. interest

4. down payment

The correct answer is: interest

The term that describes the amount of finance charge based on the unpaid balance of a loan is interest. When a borrower takes out a loan, they are typically charged interest, which is the cost of borrowing money. This charge is calculated as a percentage of the unpaid balance of the loan, meaning that the longer the balance remains unpaid, the more interest accumulates. Interest serves several functions in finance. It compensates the lender for the risk they take by loaning money and reflects the time value of money. In other words, a dollar today is worth more than a dollar in the future due to its potential earning capacity. The finance charge, or interest, varies depending on factors such as the loan amount, interest rate, and repayment term, but it is fundamentally linked to the unpaid balance. In this context, other terms such as total equity, principal, and down payment do not directly refer to the finance charge on an unpaid loan balance. Total equity relates to the ownership interest in an asset after subtracting liabilities, principal refers to the original sum borrowed excluding interest, and a down payment is an initial payment made to reduce the amount being financed. Understanding the concept of interest is crucial for anyone involved in financial transactions, as it influences borrowing costs and overall