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What is a Bank Discount?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 25 September 2016
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Bank discounts are an example of a bank charge that is made for payment of a note at some point prior to maturation. In some cases, the bank discount is applied at the time that the note or loan is extended, and is automatically deducted from the loan amount that is used to calculate the schedule of payments on the loan. This in effect means that the receiver of the loan simply repays the face value of the loan, and little or no interest.

Generally, banking institutions require compliance with a rigid set of qualifications in order for an individual or business to obtain a bank discount. One of the more common requirements for a bank discount is a solid record of previous financing with the institution. Prior repayment of loans that took place within the terms of the loan certainly influence consideration for the extension of a bank discount. If the past loan history shows no late payments and no complications with the loans, then the chances for receiving a bank discount are greatly improved.

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The level of bank credit is also a factor as well. From this perspective, the eligibility for receiving a bank discount is impacted by the current assets and liabilities of the borrower. If there is a high credit rating and it is easy to demonstrate that there is a healthy difference between assets held and outstanding balances owed, the chances for obtaining a bank discount are enhanced a great deal.

The underlying purpose of a bank discount is to reward individuals and businesses for practicing excellent financial management. Because these types of customers are considered to be such good credit risks, the bank can afford to extend a bank discount, with the expectation of being able to do business with the borrower in future projects. Along with the ongoing business relationship, there is also the good word of mouth that is generated for the bank. Happy customers tend to promote the bank to acquaintances, which may also help the bank to indirectly build a larger base of depositors and customers.

Of course, it is important to note that a bank discount can be revoked. This could happen during the course of the loan. Should the borrower fail to make a payment, or becomes unable to continue to make payments, then there is a good chance that the bank discount would be applied to the remaining balance. From this perspective, borrowers want to continue to make payments in a timely manner for the duration of the loan, in order to maintain the bank discount.

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strawCake
Post 3

I think it's interesting that some banks offer a bank discount basis at the beginning of the loan. So wouldn't this be the same thing as a low or no-interest loan?

From what I understand, a bank discount is a discount for paying off a loan early. So if it's written into the terms and deducted at the beginning of the loan, you're not really paying off the loan early?

Maybe I'm just not understanding correctly, because it doesn't make sense to me for a bank to do this.

ceilingcat
Post 2

@SZapper - I've never heard of it either, but I'm just a regular person. I'm not wealthy, and I don't own a business. I'm wondering if maybe a bank discount is something a business bank does more often than a bank that offers personal loans?

After all, it would make sense in the context of a business loan. Some businesses do millions (or billions) of dollars of business with banks. So there's a lot of incentive to keep their business.

But for the average person, most banks aren't going to bend over backward to try to keep you as a customer.

SZapper
Post 1

Wow, banks sometimes give discounts on a bank loan? I have never heard of such a thing. I've heard of them raising your interest if you're late paying, and even levying a penalty for early repayment of a loan, but I have never, ever heard of a bank discount.

I wonder if this is something that doesn't happen very often anymore? Either that or I'm just not very financially savvy.

But it really seems like these days, banks are doing whatever they can to make more money, even if it means nickel and diming their customers. I seriously cannot imagine a bank offering any kind of discount.

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