Bank Discount Interest
Bank-discount interest commonly is charged for short-term business loans. Generally, the borrower makes no intermediate payments, and the life of the loan usually is one year or less. Interest is calculated on the amount of the loan, and the life of the loan usually is one year or less. Interest is calculated on the amount of the loan, and the borrower receives the difference between the amount of the loan and the amount of interest. In the example, this gives an interest rate of 15 percent. The interest ($150,000) is subtracted from the $1 million loan amount and the borrower has the use of $850,000 for one year. Dividing the interest payment by the amount of money actually used by the borrower ($150,000 divided by $850,000), we find the effective rate is 17.6 percent.