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?

• A. Collateral
• B. Cost of Credit
• C. Duration of Loan
• D. Documentation

Hint:

{Cost of credit} refers to the interest and other charges that a borrower has to pay when taking a loan from a bank or financial institution.

Answer 1

The Correct Option is B

Concept: When a person takes a loan from a bank or financial institution, they have to repay the principal amount along with interest. The interest charged on a loan represents the cost of borrowing money, which is known as the cost of credit. Step 1: {\color{red}Understand the given situation.} Megha has taken a loan of ₹5 lakhs from a bank. The bank charges an annual interest rate of 12% on this loan.
Step 2: {\color{red}Interpret the meaning of the interest rate.} The interest rate determines the additional amount that Megha must pay to the bank for borrowing the money. This additional payment is the price paid for using credit.
Step 3: {\color{red}Identify the correct concept.} Since the interest rate represents the amount charged for borrowing money, it refers to the: \[ Cost of Credit \] Therefore, the correct answer is Option (B).