Advertisement: Our new 15/12 discount loan is perfect for quick busine

Question

Advertisement: Our new 15/12 discount loan is perfect for quick business projects. Customers can borrow an amount up to 80% of the value of their collateral assets at 15% discounted interest and have 12 months to repay the loan amount. *

*   Terms of loan:   Loan proceeds, paid by check in rupees, are equal to the loan amount less the total interest for the loan—15% of the loan amount.

A. 15/12 loan with amount n rupees is taken out by a business. Select the expressions for the repayment amount (the sum of the payments made to fully repay the loan) and the loan proceeds for this loan. Make only two selections, one in each column.

chetan2u · Accepted Answer

Firstly let me admit I am not too fond of the question, and find it a bit surprising to come from OG.

The question talks of discounted interest and loan proceeds, terms that many excl bankers etc may not be very comfortable with. Although a bit of explanation is given but doesn't seem to be very clear, especially on loan proceeds.

Solution

The discounted interest is cut upfront from the loan amount.

Discount is 15/12 , that is 15% for 12 months, so Discounted interest = 15% of n or 0.15n
Loan proceeds is the amount of loan that has to be paid back. Thus, loan amount is n-0.15n = 0.85n

Next, Repayment amount is the entire amount, so n.

What I can think of an example as?

Say someone has a property worth $1 million dollars.
He can get a loan upto 80% or say he takes a loan of $0.80 million dollars.
The 15% interest of $0.80 million dollars is cut from the loan amount, so what is given as loan is  0.85*$0.80 million dollars

Repayment is this 0.85*$0.80 million dollars plus the interest of 0.15*$0.80 million dollars that was paid initially itself before recieving the balance amount.
Total = 0.85*$0.80 million dollars + 0.15*$0.80 million dollars =  1.00 * $0.80 million dollars. 
In above, replace $0.80 million dollarsby n.

So the solution ( refer bold portion and replace ) $0.80 million dollars by n
Loan =  0.85*$0.80 million dollars = 0.85n 
Repayment =  1.00 * $0.80 million dollars = 1.00n

Sajjad1994 · Answer

Official Explanation

RO1: Repayment amount, Strategize

The terms of the loan indicate that the total interest (15% of the loan amount) is deducted up front and that the loan proceeds are the remainder. This indicates that the amount that is to be repaid is precisely the loan amount. Since  n = 1.00n  is the loan amount, in rupees, then  1.00n  is the repayment amount as well.

The correct answer is D, 1.00n.

RO2: Loan proceeds, Strategize

According to the terms of the loan, the proceeds are calculated by deducting 15% from the loan amount. Since the loan amount is n rupees,
the loan proceeds are  n - 0.157 = 0.85n.

The correct answer is G  0.85n.

Hope it helps

gvij2017 · Answer

Please explain repayment amount calculation. I am doing mistake somewhere. 
I did it as below. 
Loan amount taken: n= 80% of collateral assets 
Interest rate 15% on loan amount for 12 months.

Total repayment is n+ interest on n = n+n*0.15*1= 1.15n
Where I did wrong!

LILICHKA · Answer

I must be missing sth.

Can anyone explain, which words exactly provide information that 15% is deducted up front and that the loan proceeds are the remainder?

I also can't understand this sentence: "the loan amount less the total interest for the loan—15% of the loan amount"
Does it mean "the loan amount MINUS the total interest for the loan MINUS 15% of the loan amount"?
Or does it mean "the loan amount MINUS the total interest (WHICH IS 15% of the loan amount)"?

How with a 15% interest the total repayment amount can still be equal to the amount borrowed?

I'm so confused(

plaverbach · Answer

This one is real hard...

dearcheriand · Answer

Question created for banking people. 
Loan proceeds - means the money that borrower gets. 
Gmat says it creates the questions without bias. But the banking terms used in different parts of the world creates enough bias.
If the disbursed amount is .85n then the 15% interest should be calculated on the principal .85n not n. I think some questions are created to check for time management checking not for scoring.

Sa800 · Answer

Cn someone provide a thorough explanation…?

It looks like you might need to know some terms for this problem…. The 15% deducted up front made no sense. This whole problem makes no sense!

Kartik2121 · Answer

Let me re-write the question prompt below and give a bit of clarity on this question:

"Advertisement: Our new 15/12 discount loan is perfect for quick business projects. Customers can borrow an amount up to 80% of the value of their collateral assets at 15% discounted interest and have 12 months to repay the loan amount.*

*Terms of loan: Loan proceeds, paid by check in rupees, are equal to the loan amount less the total interest for the loan—15% of the loan amount.

A 15/12 loan with amount n rupees is taken out by a business. Select the expressions for the repayment amount (the sum of the payments made to fully repay the loan) and the loan proceeds for this loan. Make only two selections, one in each column."

I am from a non-banking background too. However, it is clear that the loan proceed appears to be an amount paid as a loan. Assuming this, one can then infer that if I take a loan of n rupees, I shall get only 0.85n rupees as loan. The interest amount shall be deducted upfront.

Now, what shall be the interest in this case:

I have taken a loan of 15% interest and borrowed n rupees. Thus, I have to repay 1.15n after a year. As I have already paid 0.15n upfront, the amount left to pay after 1 year is 1.15n-0.15n = 1.00 n

How it is clear.

dropthebase64 · Answer

I had a lot of trouble with this one as well.

After digging a bit, it is clear that there are banking industry terms used and the 'example' given to help explain it is not very obvious.  My guess is this is just a bad OG question, because:
1) the OG ranks this one Medium
2)The average time and correct answer % does not reflect that
3) GMATClub has it categorized as 805+

I think they just missed the mark with providing an explanation to level the playing field with the banking vernacular used.

The two terms that seem to be trivial in the banking industry are: "Loan proceeds" and "Discount loan"

Loan proceeds just means the amount given to the borrower, nothing more.

Upfront it uses the phrase "Our new 15/12 discount loan".  A discount loan is a type of loan product  where the amount actually given to the borrower is the 'loan amount' minus the 'loan amount multiplied the interst'.  Meaning that if I have a $100 dollar discount loan at 15% interest.  I will be given $85 (100-15) and am expected to pay to the lender $100 dollars.  So the usual interest formulas we learn preparing for the gmat are not applied here.

Once this is understood, it is pretty easy to understand that the loan proceeds "equal to the loan amount less the total interest for the loan" is simply how much the borrower is given.  So a discount loan amount of n at 15% discounted interest is just:

n(100-15)=.85n amount given to borrower, which is the "loan proceeds"
and
n amount repaid by the borrower over 12 months, which is the "repayment amount"

trinhthanhha · Answer

it's a bit challenging for someone who is not in banking and english is not his/her first language. I didnt understand discounted interest at first ( I thought it means if the interest is 10%, you have a discount 15% on 10% =8.5%. No answer fits anw. Silly me

) "Discount interest refers to a loan where the interest on the loan is deducted from the loan up front" So, if 15% is the total interest rate and the business borrows a loan amount of n ruppee: - Total payment = n+0.15n = 1.15n - Loan proceeds (the borrower receives) = n - 0.15n = 0.85n due to discount interest policy - Repayment = 1.15n -0.15n (already paid up front under the policy) = n

a191291r · Answer

My uncle used to give such loans to people at 10% interest for 100 days. For example, if someone needed Rs. 10,000, he gave them Rs. 9,000 and collected daily repayment of Rs. 100 for 100 days. He minted a lot of money back then, but one day, his biggest customer took a big loan and simply decided to not pay back. My uncle couldn't do much apart from throwing a tantrum. Few days later cops arrested my uncle (this was obviosly illegal and unregistered business). He was out on bail and after a few years his charges were dropped. That was last of his "business". We have a feeling that the cops were tipped off by that customer who refused to pay.

KarishmaB · Answer

Responding to a pm:
Industry specific terminology is used here and it is unlikely that someone will understand what it means based on what is given. Then, though it is unlikely that such a question would be a live question since very high scorers of non-banking background won't get it, one must be prepared for it in future. So go through the concept of discounted interest. Once you do, this question becomes very easy.

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Repayment amount	Loan proceeds	Expression (in rupees)
		0.15n
		0.80n
		0.85n
		1.00n
		1.15n
		1.20n

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Advertisement: Our new 15/12 discount loan is perfect for quick busine

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