This question illustrates what is known as discount interest. Imagine you are discussing a loan with a somewhat unscrupulous lender. You want to borrow $25,000 for one year. The interest rate is 15 percent. You and the lender agree that the interest on the loan will be .15 x $25,000 = $3,750. So the lender deducts this interest amount from the loan up front and gives you $21,250. In this case, we say that the discount is $3,750. What's wrong here?