As with any industry, the banking and lending community has its own language, which can be a bit confusing until you understand what those buzz words and all of that insider jargon mean. If you have student loans, or if you are shopping around for a student loan, student loan refinance, or consolidation loan to help manage student loan debt, you’ll likely encounter the financial term “basis point.”
What exactly is a basis point?
A basis point is really nothing more than shorthand for “one one-hundredth of a percent” written out as .01% In the world of number crunching sometimes these shorthand terms help to keep things simple for lenders who may be charging lots of different rates and fees but more confusing for consumers. But once you have translated “basis point” into an understandable term, it won’t puzzle you at all.
Say, for instance, that you borrow $100 and pay one basis point – which is equal to .01% of that loan. In that case your basis point would cost a penny. If you paid 100 basis points, on the other hand, it would cost you 100 pennies or one dollar.
Why does it matter to me?
The reason it helps to know these kinds of terms is so that you can be a more informed and savvy consumer. All too often, people take out student loans without really understanding the terms, conditions, obligations, and costs of those loans. That can lead to confusion and even potential financial stress and strain. But knowing how to interpret lender lingo will empower you to take more control of your student loan finances.
When you see a lender offer an incentive or perk of “reduced basis points”, you’ll be able to calculate exactly how much of a discount they are offering. Reduce a loan that charges 3.25% interest by 25 basis points, for example, and you effectively lower that rate by .25% to a new discounted rate of only 3.00%.
How do I do basis points calculations?
- The easiest way for most people to compute basis points is to first change the basis point to a decimal number. One one-hundredth of a percent written as a decimal is .0001.
- Another way to arrive at the decimal number, which is really easy, is to take the number of basis points and just divide them by 10,000. So 25 basis points would be (25 ÷ 10,000 = .0025).
- Once you have your basis points converted to a decimal you multiply that decimal by the dollar amount of the loan. For a loan of $10,000, for example, a 25 basis point reduction (.0025 X 10,000 = $25) would be a discount of $25.
What else do I need to know about basis point terminology?
The shorthand for lenders gets even more cryptic when they start abbreviating the words “basis point” or “basis points” so it helps to know that “bps” refers to basis points. If you see the abbreviation “bp” you know they mean “basis point.”
But the more important thing for borrowers to understand is that you do not have to be a financial whiz to shop for a student loan and get a fair price and terms and conditions that you fully understand. Just ask.
Lenders can answer your questions and if the answers they give are still confusing, keep asking. It is their responsibility to help you understand in clear language that satisfies you – and if they cannot do that then take your student loan business elsewhere, to someone who can give you the answers and information you need and deserve.
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