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Interest rate becomes larger than the rate given by the Bank in order to increase the yield on the amounts deposited by reducing the value of the loan fees
>>It reduces the Interest burden and directly increases your profitability
>>Cash purchases more attractive and need not rely on creditors with higher prices.
>>You can increase bank borrowing/facilities and add to your leverage.
>>Lesser cost of capital and reduced pay back period.
When a bank charges discount interest on a loan the required interest payment is subtracted from the loan proceeds at the time the loan is made. This makes the effective interest rate greater than the stated rate.
Bank rate, also referred to as the discount rate in American English, is the rate of interest which a central bank charges on the loans and advances to a commercial bank.
Whenever a bank has a shortage of funds, they can typically borrow from the central bank based on the monetary policy of the country.
The borrowing is commonly done , where the repo rate is the rate at which the central bank lends short-term money to the banks against securities. A reduction in the repo rate will help banks to get money at a cheaper rate. When the repo rate increases, borrowing from the central bank becomes more expensive. It is more applicable when there is a liquidity crunch in the market.
The reverse repo rate is the rate at which banks can park surplus funds with reserve bank, while the repo rate is the rate at which the banks borrow from the central bank. It is mostly done when there is surplus liquidity in the market.
this mean that
you will take the loan subtract from it the interest
and you will pay only principal
When a bank charges a discount interest on a loan, this means that there will be more people willing to borrow from the bank because they will have the opportunity to get a loan with a lower interest rate which in its turn will decrease the borrowers' expenses. In the long-term, since there is a great demand on loans, the banks will increase back their interest rates so that they can make larger profits.
Short-term lending arrangement in which interest amount for the entire loan period (plus other charges, if any) is deducted from the principal at the time a loan is disbursed. The borrower pays off the loan (the full principal amount) as arranged.
you only pay principal and it is good for the customer as you have paid the interest by getting less.
AGREE WITH MR GEORGI7 MR VENKITARAMAN ANSWER
I think discount interest means paying interest immediately at the time of receipt of loan. That is borrower get the loan after deducting the interest. For example suppose USD10000 is gross loan amount and interest rate is10% with agreed term of one year repayment, the borrower will get only USD9000 at the time of disbursement of loan. But he has to repay USD10000 at the end of one year. Effect is that actual interest rate is higher than the disclosed rate.
