What is a Discount Loan?

Discount Loan

Discount Loan

A discount loan is a loan arrangement where interest and any other related costs are calculated at the time the loan is granted. At the same time, the sum of interest and other costs is deducted from the amount of the discounted loan. Instead of receiving the face value of the loan, the borrower receives the reduced amount but is still responsible for repaying the full face value of the loan.

Discount loans are often issued when the borrower wants nothing more than a short-term loan. Because interest and fees are already accounting up front, setting up the schedule of payments with a discount loan requires nothing more than dividing the face value by the number of installment payments to be made. This approach allows the borrower to start paying on the principle the same without any of the repayments going to cover the interest expense.

For the lender, the discount loan is also beneficial, as this type of loan usually does not allow for breaks on the interest charges that apply to the loan. Since current interest rates and similar charges are upfront, there is no need for the lender to apply early payoff penalties or to recalculate the interest rate the borrower pays for the loan prior to the schedule. This keeps accounts required to keep the details of the loan in order relatively simple.

Discount loans are usually written as short-term loans. The idea is that the borrower needs resources faster to cover expenses in the near future, and will be able to repay the face value of the loan within a period of anywhere between three months to one calendar year. It is not uncommon for the actual rate of interest for these types of loans to be slightly higher than longer-term loans, although not necessarily so. Borrowers who have a solid credit rating and have done business with the institution in the past may be eligible for interest rates that are a little more competitive.

As a simple solution to a temporary situation, a discount loan can be an idea option. The borrowers get what they need to meet the immediate needs, and lenders are assured that the loan can reasonably be expected to be repaid in full for a short period of time. With benefits for both parties, the discount loan represents a viable Varner family opportunity for both small and large businesses.

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