Whether credit, funds or shares: whoever lends money, must pay for it. Frequently mentioned in this context is the term of agios, also referred to as surcharge, premium or sales charge. So what does that mean, and what do borrowers or investors need to know about it?
HOW IS AN AGIO DEFINED?
Anyone borrowing money from a bank must bear the costs. These costs will be added to the loan amount. This premium in the form of interest and fees is referred to as "agio". The repayment amount is therefore higher for a loan than the borrowed money. As a borrower, you usually know that there are costs to the loan amount that you have to repay. Mostly, however, one thinks primarily of the interest rates, the concept of premium is therefore less familiar to many borrowers.
WHY IS A SALES CHARGE NEEDED IN A CREDIT?
The financing bank demands a nominal interest rate for the borrowed money. This interest rate is based on the general interest rate level on the market. Thus, the bank is not completely free to set its lending rate, but rather has to be guided by market conditions. Especially in a low-interest phase, as it prevails on the capital and financial markets for some years, a borrower gets cheap money, while the banks are allowed to claim rather moderate costs in order to compete for cash-strapping customers. However, the bank has a certain amount of work with the processing and approval of the loan. She has to advise her client, she conducts the credit check, she opens the account and draws up the loan agreement. Even if the bank's internal processes are largely automated and simplified by many IT programs, the bank has to go through certain processes until the credit is approved. This expense can be financed by a premium on the loan amount. There is hardly any room for negotiation
for the customer, so this premium is an integral part of the loan. Also in terms of height can often barely negotiate.
WHAT'S THE DIFFERENCE BETWEEN PREMIUM AND DISAGIO?
A disagio is the opposite of a surcharge: it is a discount. Sometimes the term "damnum" is used. In principle, the discount and the premium are freely negotiated between the business partners, whereby the customer is usually bound by the bank's requirements. However, there is no statutory rate for up-and-down. As an indication, a value of up to seven percent, which can still be accepted by a borrower or an investor. By the way, for stocks a discount is not allowed by law, but for bonds it plays a role. If a discount was agreed for shares, the interest would increase because the interest on the nominal value of the share will be paid. For bonds, the discount is intended to adjust the interest rate of bonds already issued to current market interest rates. When interest rates rise in the market, bonds with lower interest rates are usually sold at a discount. Otherwise, it does not make sense for the investor to invest in a low-interest bond.
WHERE IS A DISCOUNT CONCRETE APPLIED?
The premium is not only used for a loan. It is agreed, for example, when securities or shares are issued. If you buy, for example, a stock for the price of 100 euros and the premium is three percent, the investor pays a total of 103 euros. The value of the stock, however, remains unchanged at 100 euros. In the case of shares, the premium corresponds to the difference between the nominal amount and the issue amount, whereby the issue amount corresponds to the current price. When buying units in a fund, investors should take a close look at contractually agreed premiums and
discounts. They differ from bank to bank, with the difference being mostly small. Some banks issue funds without an initial charge. Direct banks often use this tool as a temporary measure to encourage their clients to complete savings plans for certain funds. Such an investment is recommended for investors who are somewhat versed in funds and who dare to make their choice online at a direct bank. The initial charge is usually between one and six percent on the redemption price. The surcharge is intended to finance the distribution of the fund, so it is therefore costs that the investor has to bear.
Buying a bond has a different effect. Here the investor buys less shares at an agreed premium. The premium is usually linked to bonds issued in a high-interest phase, which promise high interest rates. Such securities are in high demand in a low interest rate phase. In order to increase the price of these bonds, a surcharge is agreed, whereby the effective interest rate decreases directly.
HOW DOES THE PREMIUM OPERATE AT INTEREST?
In the case of a loan, the premium is calculated on the face value. The interest payments are therefore not part of the surcharge. Nonetheless, the spread on interest has an impact, as it drives up the effective rate of interest and thus the overall cost of the loan. The borrower pays the premium over the entire repayment term if it is a bullet loan. If an annuity loan is agreed, the surcharge will be reduced with each repayment. The premium is usually paid by the borrower, because he is the one who receives the benefit. The lender provides the loan, he is the recipient of the premium. This also applies to the purchase of a security. As a clue to the buyer or the borrower is therefore that a premium should be taken into account when comparing offers. This avoids choosing a lender or a fund company that charges too much.
CONCLUSION: AN AGIO MUST BE CONSIDERED
As a borrower, you as well as an investor should know how a surcharge is defined and what role it plays.
Above all, one has to keep in mind that it is important to look at it in comparison before deciding on a bank or fund management company. Ultimately, the premium represents costs borne by the borrower or the investor. So if you want to take a cheap loan or who wants to invest in low-priced fund, should not lose sight of the premium. Even when buying shares or bonds, the premium is important and must not be disregarded in the purchase decision. Furthermore, he should not be confused with the disagio. This is a rebate that is also a cost item but is more commonly used for
bonds and is used to manage demand for high-yielding bonds.