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 15.7 percent. You and the lender agree that the interest on the loan will be .157 $20,000 = $3,140. So the lender deducts this interest amount from the loan up front and gives you $16,860. In this case, we say that the discount is $3,140. What is wrong here?