Frequently Asked Questions
What impact do basis points have on the interest rate of a loan?
Basis points play a significant role in determining the interest rate of a loan. A basis point, often used in the context of lending, is one one-hundredth of a percent or .01 percent. This term is commonly used when lenders discuss fees or lock in specific interest rates for loans, including business loans, car loans, credit card loans, and student loans. The impact of basis points on the interest rate of a loan can be understood through an example. Suppose you borrow $100,000 for your business at an interest rate of 6 percent. If you agree to certain conditions, your rate remains at 6 percent. However, if you don't agree to those conditions, your rate increases to 6.25 percent. This increase of 25 basis points in your interest rate results in a higher monthly payment and total interest charges. In the given example, the monthly payment at 6 percent interest is $1,110.21, with total interest charges of $33,224.60. However, at 6.25 percent, the monthly payment increases to $1,122.80, and the total interest charges rise to $34,736.12.
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