Discount Interest Loans This question illustrates what is known as discount interest. Imagine you are discussing a loan with a somewhat unscrupulous lender.

You want to borrow $20,000 for one year. The interest rate is 15 percent. You and the lender agree that the interest on the loan will be .15 3 $20,000 5 $3,000. So, the lender deducts this interest amount from the loan up front and gives you $17,000.

In this case, we say that the discount is $3,000. What’s wrong here?