The total amount paid for the use of credit is based on which of the following factors?

• A. The principal, interest rate, and length of time the credit is used
• B. The type of collateral provided
• C. The borrower's annual income
• D. Only the principal amount borrowed

Answer: (A)

Verified step by step guidance

1. Understand the concept of credit cost: The total amount paid for the use of credit is determined by the principal (the amount borrowed), the interest rate (the percentage charged for borrowing), and the length of time the credit is used (duration of the loan). These factors directly influence the total cost of borrowing.
2. Analyze the options provided: Evaluate each option to determine which factors are relevant to calculating the total cost of credit. For example, the type of collateral provided and the borrower's annual income may influence loan approval but do not directly affect the calculation of the total cost.
3. Focus on the correct factors: The principal amount borrowed, the interest rate, and the length of time are the key components used in the formula for calculating the total cost of credit. These are universally applicable in financial accounting and loan calculations.
4. Eliminate irrelevant options: Disregard options that do not directly contribute to the calculation of the total cost of credit, such as the type of collateral or the borrower's annual income.
5. Conclude with the correct answer: The total amount paid for the use of credit is based on the principal, interest rate, and length of time the credit is used. These factors are essential in determining the cost of borrowing.