Margin is the difference between the sale price of a good and the amount of its earlier purchase or manufacture. The value of the margin simply means profit, ie the cash surplus obtained through the sale.
In the banking language, the loan margin is the profit that the bank will achieve by granting credit to the client. Banks earn thanks to the margin, just like a distributor earns from selling products purchased at the producer’s price.
Bank market and Loan credit
In spite of commonly heard opinions, the interest rate on the loan is not the value that the bank will earn thanks to the loan. This profit, or margin, is only a component of the interest rate. The remaining part is the base rate, also known as the reference rate. This is the interest rate of the transaction determined by the market. The reference rate is the basis for interest on all loans.
The reference rate is independent of the bank and the borrower. Its value changes cyclically – usually a new reference rate is set every three months. Its regulation is influenced by all market mechanisms, and above all by the Monetary Policy Council – the decision-making organ of the National Bank of Poland.
The margin, unlike the base rate, has no fixed and market-determined value. Its amount depends on the preferences of the lender, that is the bank. What is important – the margin does not grow or decrease during the loan period. Its percentage, determined on the contract signed by the borrower with the bank, will not change until the end of the loan repayment, of course under the condition of its timely repayment.
When the mare is affected
The loan margin depends on the bank’s individual policy. Although its value is usually specified, it may be subject to change. The final margin is adjusted to the individual customer, his creditworthiness and preferred loan terms. Each borrower wants the most favorable margin – the lower its value, the lower the installment to pay. What are the factors that have an impact on the amount of the margin so it is worth looking at?
1. LTV indicator (“Loan to Value”)
This ratio determines the ratio of the loan amount to the value of its collateral (i.e. the value of the property for the mortgage loan). The higher the LTV ratio, the higher the cost of the loan, because for the bank, financing real estate in a higher amount is associated with significantly higher credit risk. The LTV indicator is calculated as a percentage. In 2017, its value could not exceed 80%, which obligated the borrower to contribute 20% of the real property value. For example:
– property value: PLN 100,000;
– maximum loan amount (LTV = 80%): PLN 80,000;
– required own contribution (20% of property value): PLN 20,000.
2. Purpose of the loan
It is worth remembering that the bank sets separate margins depending on the type of loan for which the borrower is trying. The lowest margin I will offer the bank in the case of a loan for the purchase of a real estate, its construction or renovation. A slightly higher margin is characterized by consolidation loans – that is, those intended for the repayment of other previously taken loans (both mortgage loans and “loans without BIK” and “chwilówki”). The highest margin is on mortgage loans, which the borrower can use for any purpose.
3. The amount of own contribution
Here, the rule is simple: the higher the own contribution, the more attractive the margin for the borrower. These differences, depending on individual offers, can be so significant that it will be more cost-effective to suspend the decision to take a loan, collect more savings and re-apply for a mortgage.
4. Analysis of the risk and situation of the borrower
This is an extremely significant factor when determining the amount of the margin. Before the bank grants a loan, it carries out the verification of the borrower. Checks its current financial situation, credit history or the duration of cooperation with a given bank. The better the financial situation of the client turns out, the more profitable the margin will be awarded.
However, not only earnings are important for the bank, but also how the client is employed. People who have a contract of employment, preferably for an indefinite period, will be highly credible for the bank and will certainly receive a favorable loan margin.
The margin also depends on how long we are clients of the bank. Long-term clients with confirmed financial liquidity can count on a low margin. It is also important to use additional products offered by the bank – debit, credit card, insurance, etc. Buying these services may reduce the loan margin, but it is worth checking whether it will be profitable for us.
Margin and commission
Margin and commission are often undefined values. Although both elements constitute a profit for the bank, they are not the same.
The commission is a one-off fee, which the client usually brings in advance when paying out some loans and credits (eg “quick loan for evidence”). The commission is determined as a percentage of the loan value. For example: a 2% commission for a loan in the amount of PLN 100,000 will amount to PLN 2,000.
It happens that the commission is included in the loan, i.e. it is subject to paying in installments together with the remaining repayment value. This is most often the case of loans taken for large sums, where paying a one-off commission would involve significant costs.
Margin, unlike commissions, is not a one-off fee, but charged along with installments. The relationship between the amount of margin and commission is obvious: the lower the margin, the greater the commission and vice versa. The bank will always earn a loan – if it reduces one fee, it will certainly increase the other. Therefore, non-commission loans are not always profitable. No commission will be compensated by a high margin paid by the borrower together with installments.
So what should you choose: an offer with a low margin, but a high commission for granting a loan, or a loan free of charge with a high margin? This question is difficult to answer unequivocally. Many variables influence the solution to the problem, therefore, when deciding on a loan, you should individually calculate the cost of both offers and choose a more favorable option.
However, there is one constant dependence on the profitability of loans: if we decide on a loan with a long repayment period, the loan option with a high commission, but a low margin, will be more advantageous. If, on the other hand, we want to pay off your loan earlier, it will be more profitable to offer a non-commissioned offer with a higher margin.
Examples of margins
The loan margins offered by banks for loans in PLN currently (depending on various factors) range from about 1.5 to 4 percent. For example, the “Lekka rata” mortgage loan at ING Bank Śląski offers a 1.69% margin, whereas the proposed margin in the “Rent as you like” mortgage loan amounts to as much as 3.50% (data as at 29/03/2018).
These are, of course, averaged values and it is worth bearing in mind that depending on the amount of credit, individual preferences and credit history of the client, they may change significantly.
Choosing a loan offer that assumes profitable margins and commission is an extremely important and profitable step. However, in addition to the offer with the lowest possible margin, it is also important to choose the most favorable period and method of crediting for a given client. It is also important to look at peri – credit costs : both the basic one (commission, bridge insurance or low own contribution insurance) as well as non-banking costs (eg the cost of establishing a mortgage, material fees and tax on civil law transactions).
The offers are worth changing so long, until there is the best option and meeting our expectations. Time spent searching for the best offer guarantees the best investment and finance management.