Final answer:
The lender charges interest to compensate for opportunity cost while waiting for repayment.
Step-by-step explanation:
The lender charges interest to compensate for the opportunity cost while waiting for repayment. Interest is the cost of borrowing money and is calculated as a percentage of the loan amount. It is a way for the lender to earn a return on their investment and to offset the potential loss of income they could have earned if they had invested the money elsewhere.
For example, if a lender loans $1,000 to a borrower and the agreed interest rate is 5%, the borrower would need to repay $1,050 ($1,000 + 5% of $1,000) to the lender.
The interest charged by the lender is based on various factors such as the borrower's creditworthiness, the length of the loan period, and the prevailing market interest rates.