Frequently Asked Questions

In what scenarios might I encounter the term “basis point”?

The term “basis point” is commonly encountered in various financial scenarios. When you're searching for a business loan, lenders often use the term basis point to discuss fees on your loan or when locking in a specific interest rate. It's also a term you might come across when borrowing money for a car, reviewing your credit card statements, or when taking out a student loan. Basis points, which represent one one-hundredth of a percent (.01 percent), are used in calculations related to these financial transactions. For instance, if you borrow $100 and you're paying 200 basis points, it will cost you two dollars. Moreover, basis points are significant in the context of perks and penalties. A lender may offer you a lower interest rate on a loan if you pay basis points, effectively altering the interest rate on the loan. For example, if you borrow $100,000 to grow your business at an interest rate of 6 percent, agreeing to certain conditions could lower your rate to 6.25 percent. This difference in basis points could result in lower monthly payments and lower total interest charges.