What is the cost of credit in relation to a loan?

• A. It is the projected loan repayments over the term of the mortgage assuming the same interest rate applies.
• B. It is the total projected loan repayments over the term of the mortgage less the interest charged.
• C. It is the total projected loan repayments over the term of the mortgage less the capital borrowed.
• D. It is the projected capital payments over the term of the loan.

Answer: (C)

Cost of credit is the price you pay to borrow money—the interest and any fees charged on the loan. It represents the extra amount you repay over the principal borrowed. To find it, take all the repayments you’re projected to make over the loan term and subtract the amount you originally borrowed (the capital or principal). The remaining figure is the cost of credit.

That’s why the described method—total projected repayments over the term minus the capital borrowed—best matches how cost of credit is defined. Other ways of framing it either describe total payments without removing the principal, or subtract the wrong component (leaving principal plus fees) or focus only on principal repayments (capital payments).