Question

You are looking at a one-year loan of $11,000. The interest rate
is quoted as 9.2 percent plus four points. A *point* on a
loan is 1 percent (one percentage point) of the loan amount. Quotes
similar to this one are common with home mortgages. The interest
rate quotation in this example requires the borrower to pay four
points to the lender up front and repay the loan later with 9.2
percent interest.

What rate would you actually be paying here?

Answer #1

Let us first understand the meaning of the quote "9.2%+4points"

The borrower should pay an upfront cost of 4points to the lender in order to possess the One-Year Loan of $11,000 at an interest rate of 9.2%

A point is a number represented in % of Loan Principal

-> The upfront cost paid = 4points = 4% of Loan Principal = 4% of $11,000 = 0.04*11,000

**-> The upfront cost paid= $440**

Therefore the borrower has to pay an upfront cost of $440 to get this One-Year Loan of $11,[email protected]%

**Thus the rate that borrower would be actually paying
towards this loan = 9.2%**

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