A bank will charge a higher interest rate the:
A) longer is the length of the loan, and the higher the risk of repayment.
B) longer is the length of the loan, and the lower the risk of repayment.
C) shorter is the length of the loan, and the higher the risk of repayment.
D) shorter is the length of the loan, and the lower the risk of repayment.

Question

Quizplus · Accepted Answer

Generally, the longer the length of a loan, the higher the interest rate charged by a bank. This is because the bank is tying up its funds for a longer period of time, and therefore wants to be compensated for the opportunity cost of lending out that money. Additionally, if the risk of the borrower repaying the loan is higher, the bank will charge a higher interest rate to account for that increased risk.

A Bank Will Charge a Higher Interest Rate The