Discount Rate
There are different ways the term discount rate is used in finance, but in the context of business loans, lenders use the discount rate to “discount” future repayments to their present value. This reflects the time value of money.
In a discounted business loan, the lender deducts interest upfront from the loan principal, and the borrower receives less than the full loan amount but still repays the full amount. Because the borrower pays interest on the full loan amount while only receiving part of it, the effective interest rate will be higher than the nominal or simple interest rate.
Lenders use a discount rate to assess risk and determine the cost of lending. That in turn affects the terms of the loan, including interest rates. Higher discount rates indicate higher perceived risk for the lender and result in higher interest rates for borrowers. Conversely, lower discount rates signal lower risk and typically lead to more favorable loan terms and interest rates for borrowers.
Financial Glossary
Use Lighter Capital's glossary to understand common terms used in finance and investing, so you can build financial literacy and make informed decisions for your startup.
Discount Rate
There are different ways the term discount rate is used in finance, but in the context of business loans, lenders use the discount rate to “discount” future repayments to their present value. This reflects the time value of money.
In a discounted business loan, the lender deducts interest upfront from the loan principal, and the borrower receives less than the full loan amount but still repays the full amount. Because the borrower pays interest on the full loan amount while only receiving part of it, the effective interest rate will be higher than the nominal or simple interest rate.
Lenders use a discount rate to assess risk and determine the cost of lending. That in turn affects the terms of the loan, including interest rates. Higher discount rates indicate higher perceived risk for the lender and result in higher interest rates for borrowers. Conversely, lower discount rates signal lower risk and typically lead to more favorable loan terms and interest rates for borrowers.
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