Question

Read the following case and choose the correct option:

Megha has taken a loan of ₹ 5 lakhs from bank to purchase a house. The annual rate on the loan is 12% and loan is to be repaid in 5 years in monthly instalments.

The 12% interest charged by the bank to Megha is related to which of the following?

Options

• Collateral

• Cost of Credit

• Duration of Loan

• Documentation

Answer 1

Cost of Credit

Explanation:

The 12% interest rate is the “cost” Megha incurs when borrowing money from the bank. While collateral, length, and documentation are all needed credit terms, the interest rate is the single most important factor in determining the entire cost of borrowing.