Interest expense

Interest expense is the cost a borrower pays to use a lender's funds over a set period. It is the price of borrowing, usually stated as a percentage of the amount borrowed. This expense compensates the lender for providing the funds and for the risk of 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 depends on the repayment schedule and the remaining principal balance. By understanding the interest expense tied to a loan, borrowers can plan repayments better, manage cash flow, and reduce the total cost of borrowing.