If your bank gives you a $2,000 loan at 8% per year, but deducts the interest in advance, is 8% the "real" rate of interest that you will pay?
A) Yes.
B) No.The interest rate is actually lower than 8 percent.
C) No.The interest rate is actually higher than 8 percent.
D) There is not enough information to answer this question accurately.

Question

Quizplus · Accepted Answer

When interest is deducted in advance, it is known as a separate fee, called discount interest or interest in advance. In this case, the borrower will only receive $1,960 ($2,000 - $40 of interest) and will have to pay back the full loan amount of $2,000. Therefore, the effective interest rate is actually higher than 8%, making option C the correct answer.

If Your Bank Gives You a $2,000 Loan at 8