What is the purpose of discount points in the context of a loan?

Discount points are a tool used by borrowers to reduce the interest rate on a loan. When a borrower pays discount points upfront, they are essentially prepaying a portion of the interest, which results in a lower interest rate over the life of the loan. For example, one discount point typically costs 1% of the loan amount and can lower the interest rate by a fraction of a percentage point. This reduction can lead to significant savings over time through decreased monthly payments and lower total interest paid.

The other choices explore concepts that are not directly related to the function of discount points. While points can affect the overall cost of the loan, they do not alter the principal amount borrowed, extend the loan term, or directly improve a credit score. Instead, their primary purpose remains focused on making borrowing more affordable by decreasing the interest rate when points are paid upfront.