What is a discount loan?

A discount loan is a short-term loan that has the interest and other borrowing fees subtracted from it when the borrower receives the disbursement; therefore, the borrower actually receives the face amount minus the interest. One example of the use of discount loans is the Federal Reserve offering them to banks. For example, a bank may request a $20,000 loan from the Federal Reserve, and the bank's reserves would increase by $20,000 minus the interest amount.

With traditional loans, the borrower may get the face value amount, which is called the principal. Interest is charged on the principal at an annual rate, and the charges may accrue as often as daily until the loan is fully paid off.