Discount Interest Explained: How It Works & Examples

Discount interest is a type of interest that is paid with some types of loans. Here are the basics of discount interest and how it works.

Discount Interest

With this type of interest, the amount of interest is going to be calculated and subtracted from the amount of money that is borrowed. By doing this, the lender is reducing the amount of money that they have to loan out and protecting themselves at the same time

Example

This type of interest is easiest to understand when you can see an example of it. For example, let's say that an individual want to borrow $10,000 from a bank. The bank was willing to loan them the money at 7% interest. The bank would then calculate how much interest that would be on a $10,000 loan. The amount of interest what equal $700 in this case. At that point, the bank would subtract the $700 in interest from the $10,000 that they are going to loan to the individual. Therefore, this could result in the individual getting a check for $9300 instead of the full $10,000. When he repays the loan, he is going to have to give the bank the full $10,000.