Interest expense

Interest expense is the cost incurred by a borrower for using a lender's funds over a given period, like the price paid by a traveler for a horse to carry them on their journey. This expense, typically expressed as a percentage of the borrowed amount, represents the compensation paid to the lender for the opportunity to use their resources and the risk they assume by extending credit.

Example

Suppose a borrower takes out a $10,000 loan with a 5% annual interest rate and a repayment term of 2 years. The interest expense for the first year would be $500 ($10,000 x 0.05), assuming no principal repayments are made during that time. The interest expense for the second year would depend on the repayment schedule and the remaining principal balance. By understanding the interest expense associated with a loan, borrowers can better plan their repayments, manage their finances, and minimize the overall cost of borrowing.