Applying for a loan is a serious decision, so you need to approach it with caution. There are many offers of non-bank companies on the market that differ in terms of repayment method or interest rate. Most people choose a loan based on the amount of the commission and the interest rate. An important component of such offers is also the margin, which we often forget when using financial products.
What is the installment loan margin?
When taking a loan, you can come across the concept of interest rate, which directly affects the total cost of repayment and the number of installments. In addition, there is also a margin, which is nothing but a value on which the financial institution granting loans earns. The amount of the margin depends mainly on the amount of the loan and is a profit that is included in the cost of the loan. Customers usually don’t feel this value because the credit margin is already included in the total cost of service. The margin is included in the interest rate on the loan and next to the base rate it is its main component. Therefore, the borrower often does not wonder what margin is assigned to a given product, because he is guided mainly by the interest rate which is an important part of the loan cost.
What determines the installment loan margin?
Each financial institution has the right to determine the amount of the margin itself. However, taking into account the high competitiveness on the market, non-bank companies are trying to adapt it to the capabilities of customers. As is already known, the margin is a component of interest, so raising the margin would automatically involve a higher cost of credit. In such a situation, the potential customer would choose a different offer, with a more favorable interest rate, which is why non-bank companies are trying to determine the margin at an optimal level. What determines the margin and what affects its amount?
- Total loan amount – the higher, the higher the margin added.
- Credit history – reliable customers who regularly meet their commitments can count on negotiating better terms. The margin is a kind of security in the event that the customer stops paying off regularly.
- Commission – it can be one-off or added to subsequent installments, which is important for the amount of the margin.
Non-bank companies can decide on the loan costs themselves, making them dependent on the borrower’s situation. This means that regular customers who reliably pay off subsequent installments can count on a more favorable offer in the future.
Credit margin and interest rate
The margin is a component of interest, but these two concepts differ from each other. Many people think that interest is a value that is profitable for the company due to the loan. Although the margin is set by each lender, the reference rate, which is also included in the interest rate, is imposed from above. The base rate, i.e. the reference rate, is determined by the market and the Monetary Policy Council. Its amount is affected by market changes, which is why the reference rate is also cyclically variable. On the other hand, the margin is the same throughout the loan period, so if the borrower pays off installments in a timely manner, it is not possible to raise or lower the margin during the term of the contract. The loan margin and interest rates are interrelated, but they mean quite different values in shaping the total cost of the loan.
Commission and margin
The commission is also a component of the total cost of loan repayment. This is usually a one-time fee to pay for the loan. Some lenders, however, include a commission in the cost of the loan, including a commission in installments. The commission and the margin is different in that the margin is repaid in installments and does not constitute a fee that must be paid in advance. Both of these components of loan costs are a profit for the company, which is why they are usually determined independently of each other. This means that a low commission has a higher margin and vice versa.
Margin and APRC
The Actual Annual Interest Rate is a component of all fees that affect the total cost of repayment of the loan. The APRC includes administrative fees, credit insurance, commissions and margins. Although the margin is an interest component, it is also included in the APRC as the sum of all fees. The calculation of the margin is based on the simple formula:
MARGIN = LOAN INTEREST RATE – REFERENCE RATE
In this way, you can determine how the installment loan margin affects interest, which also contributes to the APRC.
Margin and loan installment
The installment amount depends on the loan amount and the loan period. An installment loan with an extended-term will have a higher total repayment amount as it is divided into more installments. The amount of the margin has a direct impact on the installment amount because as you already know, it is a component of the interest rate. Not always, however, a lower margin means a lower installment, as this difference can be offset by a higher commission. Especially in banks, you can find offers that advertise with a 0% margin. Then, however, it is worth paying attention to the commission, which can significantly exceed the average value found on the market.
It is also worth paying attention to the fact that the commission is a one-time payment paid in advance. With large loan amounts, a high commission calculated on the basis of the total could mean the necessity of paying even several thousand zlotys. The margin, which is already added to the cost of the loan and included in each installment, is less noticeable for the borrower. The margin is most important in the case of a mortgage because the contract is signed for many years and a large amount of money.
Even 1% of the difference in the margin between the offers generates high costs throughout the entire loan period, so it is worth analyzing all the loan fees beforehand. In the case of installment loans, which are contracted for a shorter period, the most important parameter is the interest rate and APRC, which affects the amount of installments.