What is a Basis Point?

One of the terms you may hear when searching for a business loan is basis point. This is a fairly common term when lenders are talking about fees on your loan. They also may apply when a lender is locking in a specific interest rate. You may have also heard this term if you were borrowing money for a car, on your credit card statements or when you took out a student loan.

Simply put, a basis point is one one-hundredth of a percent. Written out it is .01 percent. An example of how a calculation is made is if you borrow $100 and you're paying 200 basis points, it will cost you 200 pennies or two dollars.

The formula looks like this: $100 x .02 = $2.00

Why are Basis Points Important?

Basis points are used for both perks and penalties. For example, a lender may offer you a lower interest rate on a loan if you pay basis points. This means you are paying a different interest rate on the loan. Here is an example of how a lender may use basis points as a perk or an incentive:

Perks

Penalties

Starting interest rate 6.00

Starting interest rate 18.00 percent

Incentive to close in 60 days .25 basis points

Late payment penalty .25 basis points

New Loan Rate 5.75 percent

New Interest Rate 18.25 percent

Why Basis Point Matters to You

Let's assume you borrow $100,000 to grow your business. If your interest rate is 6 percent if you agree to certain conditions.  If you don’t agree to those conditions, your rate will be 6.25 percent. Here's the difference it makes to you.

$100,000 for 10 years at 6 percent

  • Monthly Payment:   $1,110.21

  • Total Payments: $133,224.60

  • Total Interest: $33,224.60

$100,000 for 10 years at 6.25 percent

  • Monthly Payment: $1,122.80

  • Total Payments: $134,736.12

  • Total Interest: $34,736.12

As you can see, the lower rate means lower monthly payments and lower total interest charges. If you would like more information on how to calculate Basis Point, click here for a Basis Point Calculator