What is the term for the cost associated with borrowing money?

The term for the cost associated with borrowing money is interest. Interest is the charge for the privilege of borrowing money, typically expressed as a percentage of the principal amount. When individuals or businesses take out loans, they repay not only the principal—the original amount borrowed—but also the interest, which compensates the lender for the risk of lending and the time value of the money.

In any borrowing arrangement, the interest can be calculated in different ways, such as simple or compound interest, further underlining its role as a cost of financing. Understanding interest is crucial for mortgage loan officers, as it directly impacts the affordability of loans for borrowers and the overall cost of homeownership. This concept is fundamental in both consumer finance and commercial lending environments.

The other terms listed may be associated with financial transactions but do not specifically refer to the cost of borrowing. Fees generally refer to various service charges, principal denotes the original sum of money borrowed or invested, and dividends relate to a portion of a company’s earnings distributed to shareholders, none of which directly describe the cost incurred for borrowing funds.