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%