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The effective rate on a discounted loan is significantly influenced by the amount of usable funds that the borrower ultimately receives after the loan is processed. In a discounted loan, the lender deducts interest upfront from the total loan amount, which means that the borrower receives less than the stated loan amount. The difference between the total loan amount and the net proceeds represents the cost of borrowing, which effectively raises the borrower’s actual interest cost.

Usable funds are particularly crucial in this context because they represent the real amount that the borrower can utilize, and this affects how the interest is calculated. The effective interest rate considers both the amount of interest paid and the amount that is actually available for use, which results in a clearer picture of the loan's cost relative to the funds received.

Loan amount, net proceeds, and compensating balances are all factors related to the loan structure, but they do not directly define the calculation of the effective rate in the same way that usable funds do, as they do not reflect the actual monetary capacity of the borrower to utilize funds after any deductions.