Basis Point: Everything You Need to Know

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:

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