What are borrowing costs?

Borrowing costs are how much you pay to borrow something from someone else.

Imagine you want a new toy, but you don’t have enough money right now. So you ask your friend if you can use their money to buy it. In return, you promise to give them some extra candies later, that’s like borrowing costs. The more candies you owe, the higher the cost.

Sometimes instead of a friend, you borrow from a bank. Banks are like big toy stores with lots of money. If you ask them to lend you money for something fun or useful, like a bike or a game console, they might say yes, but they’ll want extra coins (or dollars) as borrowing costs.

If the bank thinks you're very likely to pay back your promise, they might charge you fewer candies. But if they think you might forget, they might ask for more candies, that’s how borrowing costs can change.