The sentence translates to
The worse has already passed.
lo used instead of
el? When am I supposed to use one over the other?
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Whereas English has only one definite article, "the", Spanish has five definite articles:
I imagine you already knew the above. The interesting case is the fifth definite article:
Unlike the first four definite articles listed above, lo does not define a gender, and for that reason we say it has a neuter gender. This is very interesting because nouns in Spanish are either feminine or masculine. There is no such a thing a neuter noun in Spanish. However, using "lo" is possible to construct noun phrases with an undefined/neuter gender.
Let's examine the sentence in your question:
Lo peor ha pasado (the worst is over)
The subject in this sentence is "lo peor". As explained above, "lo" is a neuter definite article. This article is combined with the adjective "peor" (worst) to construct the noun phrase "lo peor", which specifies no gender.
When we write:
Lo peor ya ha pasado (the worst is already over)
we don't specify the gender, because we don't know it. We could mean:
La peor parte ya ha pasado (the worst part is already over)
or we could mean:
El peor peligro ya ha pasado (the worst danger is already over)
or we could mean something else.
As you see, the construction "lo + (masculine singular adjective)" is very handy, because it allows you to construct a noun phrase out of an adjective.
In your example it's not evident, but I think it's also important to point out, that "lo" precedes an adjective in its masculine singular form. For example:
Lo bueno es que lo malo pasa (the good thing is that bad things end)
we don't say:
Lo buena es que lo mala pasa
Your translation in your question is wrong.
The worse has already passed
That would be the translation if you used
So why does it sound funny? Because
El peor ... is incorrect
peor and soaks it in as an adjective. while
El looks to
peor as an indicator to another noun.
El peor equipo de la NBA.