Bank discount is the interest on a loan deducted at the time the loan is made. The interest is computed in advance and deduction in lump sum is offered when the loan amount is given. The amount is computed from the date of the loan to the date of the final payment on the basis of the original amount of the loan. In some cases, a bank discount is applied when a loan is extended, and is automatically deducted from the loan amount. The effect of deduction is that a consumer need only repay the face value of the loan and s/he need not pay the interest.
A consumer applying for bank discount must maintain a solid record of previous financing with the bank. A person failing to repay previous loan amount cannot avail bank discount. Customers practice better financial management by availing bank discount. Usually, banks extend a bank discount to preferred customers with the expectation that they can do better business with the borrower in future projects. When a customer fails to repay future instalments, a bank can apply discount to the balance. Usually, a customer makes a timely repayment to maintain bank discount.