Bank discounts are an example of a bank charge that is made for payment of a note at some point prior to maturation. In some cases, the bank discount is applied at the time that the note or loan is extended, and is automatically deducted from the loan amount that is used to calculate the schedule of payments on the loan. This in effect means that the receiver of the loan simply repays the face value of the loan, and little or no interest.
Generally, banking institutions require compliance with a rigid set of qualifications in order for an individual or business to obtain a bank discount. One of the more common requirements for a bank discount is a solid record of previous financing with the institution. Prior repayment of loans that took place within the terms of the loan certainly influence consideration for the extension of a bank discount. If the past loan history shows no late payments and no complications with the loans, then the chances for receiving a bank discount are greatly improved.
The level of bank credit is also a factor as well. From this perspective, the eligibility for receiving a bank discount is impacted by the current assets and liabilities of the borrower. If there is a high credit rating and it is easy to demonstrate that there is a healthy difference between assets held and outstanding balances owed, the chances for obtaining a bank discount are enhanced a great deal.
The underlying purpose of a bank discount is to reward individuals and businesses for practicing excellent financial management. Because these types of customers are considered to be such good credit risks, the bank can afford to extend a bank discount, with the expectation of being able to do business with the borrower in future projects. Along with the ongoing business relationship, there is also the good word of mouth that is generated for the bank. Happy customers tend to promote the bank to acquaintances, which may also help the bank to indirectly build a larger base of depositors and customers.
Of course, it is important to note that a bank discount can be revoked. This could happen during the course of the loan. Should the borrower fail to make a payment, or becomes unable to continue to make payments, then there is a good chance that the bank discount would be applied to the remaining balance. From this perspective, borrowers want to continue to make payments in a timely manner for the duration of the loan, in order to maintain the bank discount.