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: 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: 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: 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).