Question
In a discount basis loan, interest is "paid" at the time the loan is made by deducting the interest amount from the loan amount.
Answers
GPT-4o mini
Yes, that's correct! In a discount basis loan, the interest is calculated upfront and deducted from the total amount of the loan at the outset. As a result, the borrower receives a smaller amount than the face value of the loan.
For example, if you take out a loan for $10,000 with a 10% discount interest over a year, the interest (in this case, $1,000) is subtracted from the loan amount, meaning you actually receive $9,000 in cash. At the end of the loan term, you are still required to repay the full $10,000.
This method of calculating interest is common in certain types of loans like treasury bills, some lines of credit, or short-term loans. It's important for borrowers to fully understand how this type of interest calculation works, as it could affect the overall cost of borrowing.
For example, if you take out a loan for $10,000 with a 10% discount interest over a year, the interest (in this case, $1,000) is subtracted from the loan amount, meaning you actually receive $9,000 in cash. At the end of the loan term, you are still required to repay the full $10,000.
This method of calculating interest is common in certain types of loans like treasury bills, some lines of credit, or short-term loans. It's important for borrowers to fully understand how this type of interest calculation works, as it could affect the overall cost of borrowing.