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 amount 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?
Credit margin and interest rate
The margin is a component of interest, but these two concepts differ from each other. Many people think that the interest rate is a value that is a profit for the company by granting 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