Basis Point

Full definition

Basis points (abbreviated 'bps' and colloquially called 'bips') eliminate ambiguity when discussing rate changes. Is a '1% increase' in rates a 1 percentage point increase (from 5% to 6%) or a 1% relative increase (from 5% to 5.05%)? Basis points are unambiguous: 100 bps always means one full percentage point. Conversion: 1 basis point = 0.01%. 10 basis points = 0.10%. 25 basis points = 0.25%. 50 basis points = 0.50%. 100 basis points = 1.00%. 200 basis points = 2.00%. Where you encounter basis points: Federal Reserve announcements: 'The Fed raised rates by 25 basis points' means the federal funds rate increased by 0.25 percentage points. Loan pricing sheets: 'Your rate is 150 bps above Prime Rate' means Prime + 1.50%. Mortgage rate locks: 'We'll hold this rate for 45 days for a cost of 0.375 discount points (37.5 basis points of loan amount).' Autopay discounts: 'We offer a 25 basis point (0.25%) rate discount for autopay enrollment.' Why it matters for personal loan borrowers: When comparing loan offers, rate differences are often expressed in basis points. A 50 basis point difference in rate on a $20,000 loan over 48 months equals approximately $200 in total interest. A 200 basis point (2%) difference equals approximately $800. The larger the loan and the longer the term, the more meaningful each basis point becomes.

• APR (Annual Percentage Rate)
• Prime rate
• Floor Rate