What is the difference between a credit margin and an interest rate?

The interest rate is the whole price of the money. On a floating business loan it is usually the base rate plus the credit margin, so a 6.5% rate might be a base of 4.0% and a margin of 2.5%, in illustrative numbers. The base rate changes with the market at each reset. The margin stays where it was agreed unless the facility provides for a change or the loan is renegotiated.

Can a bank change the margin on a business loan?

It depends on the document. On a committed term facility, the margin generally stands for the term unless the agreement contains a ratchet, a review right or a change triggered by some event. On a facility repayable on demand, or one reviewed each year, the bank has more room to reprice at a review. A borrower asking for a waiver or an extension should expect the margin to be raised as part of the discussion.

Does fixing my interest rate fix the margin?

A swap fixes only the base-rate part. The margin continues to be paid on the loan and can still change if the facility allows it. A fixed-rate loan quoted as a single number has both parts inside it, and whether the margin can move during the fixed period depends on the terms. Where the rate is fixed by the bank, an early repayment may also bring a break cost, so the terms repay careful reading.

Is the credit margin the bank's profit?

No. Out of the margin the bank must pay any funding cost above the base rate, the average losses it expects on loans of that kind, a return on the capital it holds against the loan, and the cost of assessing and monitoring it. Profit is what remains. A margin that looks generous on a weak borrower can leave little behind, because a greater share of it is already spoken for by expected losses and capital.

// WORKED EXAMPLETHE ARITHMETIC A DECISION RESTS ON

Credit Margin: a Worked Example

Fix the base rate and the margin is still open.

BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED 2026-11-09 · 6 MIN READ

// THE SHORT ANSWER

When a borrower asks what its loan costs, the answer is usually two numbers added together, and only one of them is about the borrower. The credit margin is that one: the percentage a lender adds to a market base rate, set when the facility is agreed. It does not follow the market, and hedging does not reach it. In the example here, a mattress maker fixes its base rate with a swap at 3.80% and then pays US$30,000 a year more when its margin rises half a point at a review the facility allowed.

BASIS Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.

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PART OF How Banks Price a Business Loan

// 01 — TWO PRICES IN ONE RATE

A floating business loan quotes one all-in rate, but it is built from two prices set by different people. The base rate comes from a market and resets each interest period. The margin is written into the facility letter or agreement, and the lender chose it after reading the business. A borrower looking at a rate rise needs to know which half has moved, because the two have different causes and different cures.

The base differs by market and by size of loan. In New Zealand, interest on large corporate loans is often set by reference to the BKBM bank bill rate. In Australia, three-month BBSW is the benchmark for most loans to medium and large businesses. In the UK, larger sterling loans have moved from LIBOR to SONIA, commonly compounded in arrears. Smaller facilities are often priced differently: in New Zealand and Australia off a rate the lender publishes itself, and in the UK often off the Bank of England's Bank Rate, with a margin on top. Where the base is the lender's own, the margin is still there even when the borrower cannot easily see the base beneath it.

// 02 — WHAT SETS THE MARGIN AND WHAT MOVES IT

All-in rate = base rate + credit margin

Interest = all-in rate × balance drawn

Margin ≈ expected loss + capital charge

+ funding above base + running costs + profit

The build-up is worked on the risk-based pricing page. Once agreed, a margin on a committed term loan stands unless the document says otherwise. Four things can change it. A margin grid or ratchet moves it automatically with leverage or cover. A review clause lets the lender reset it on set dates, and a facility repayable on demand can often be repriced on notice. A waiver or amendment is often the moment a lender asks for more. And a refinancing resets everything.

A margin quoted alone is also not the whole price. Some facilities add a line fee on the full limit or a commitment fee on the undrawn part, so two margins can only be compared with their fees beside them.

// 03 — THE EXAMPLE

A mattress maker, constructed for this page like every figure on it, has a US$6.0m term loan fully drawn, with interest at a three-month base rate of 4.00% plus a margin of 2.35%. It enters a swap for the full balance, paying a fixed 3.80% in exchange for the floating base. All the rates are the example's.

Floating: 4.00 + 2.35 = 6.35% × 6.0m = US$381,000 a year

Swapped: 3.80 + 2.35 = 6.15% × 6.0m = US$369,000 a year

Margin reviewed to 2.85% after earnings fall:

Swapped: 3.80 + 2.85 = 6.65% × 6.0m = US$399,000 a year

Change from the margin: 0.50% × 6.0m = US$30,000 a year

If the base rate then falls to 3.00%:

Had it stayed floating: 3.00 + 2.85 = 5.85% × 6.0m = US$351,000 a year

Swapped: 3.80 + 2.85 = 6.65% × 6.0m = US$399,000 a year

The maker's directors had believed the interest bill was fixed. What was fixed was the base. The swap's bank pays the floating leg and the borrower pays 3.80%, but the loan's margin is untouched by that exchange, so the review reached the bill in full. The last two lines show the other half of the bargain: the swap also stops the borrower benefiting if the base falls, and the swap may be costly to close if it refinances early.

// 04 — HOW IT DIFFERS FROM THE BASE RATE AND THE NIM

Base rate movements are the market's, and every borrower on that benchmark gets the same change on the same reset date. A margin movement is addressed to one borrower. This is the quickest way to read a letter announcing a higher rate: if the benchmark moved, the bank is passing on the market; if the margin moved, the bank has changed its view of the borrower, its own costs or its appetite for the sector.

The credit margin is also not the bank's net interest margin, though the words are close. The credit margin is one loan's price over a base rate. Net interest margin is a whole-bank ratio: net interest income over earning assets. A loan's margin must first pay for the bank's funding above the base, so it is not profit.

DEFINED IN ONE PARAGRAPH → · A SWAP, FROM THE BORROWER'S SIDE → · WHY BANKS REPRICE →

// 05 — WHERE IT DECIDES A FILE

In a term sheet, the margin is rarely the only thing on the table, and it is often traded against others. A lender may accept a lower margin for tighter covenants or better security, and a borrower may accept a higher one for a longer term or fewer undertakings. Reading the agreement matters as much as the number: which dates allow a review, what can trigger one, and whether a ratchet can go up as well as down.

When the business weakens, the margin is also a signal. A rise at a review may tell the borrower its grade has moved, sometimes before any covenant has been breached. It adds to the interest bill exactly when earnings are lower, which is worth testing in the forecast. Interest cover on a stressed margin, as well as a stressed base rate, is a sum a lender may run.

PRICING AND FEES → · COST OF FUNDS →

// SOURCES

The documents the statements on this page rest on. Each was opened and checked when cited.

Financial Markets Authority (New Zealand), Bank Bill Benchmark Rate and closing rates, October 2017 — page 1 — Interest on large corporate loans is often calculated by reference to the BKBM rate, while most personal and mortgage loans follow a rate set by the bank — section 01.
Reserve Bank of Australia, Developments in Banks' Funding Costs and Lending Rates, Bulletin, March 2023 — Three-month BBSW is the benchmark for most loans to medium and large businesses — section 01.
Working Group on Sterling Risk-Free Reference Rates, Use Cases of Benchmark Rates: Compounded in Arrears, Term Rate and Further Alternatives, January 2020 — Overnight SONIA compounded in arrears was expected to become the norm in most sterling loan markets, and smaller corporates might use alternatives such as Bank Rate — section 01.

// QUESTIONS PEOPLE ASK

What is the difference between a credit margin and an interest rate?: The interest rate is the whole price of the money. On a floating business loan it is usually the base rate plus the credit margin, so a 6.5% rate might be a base of 4.0% and a margin of 2.5%, in illustrative numbers. The base rate changes with the market at each reset. The margin stays where it was agreed unless the facility provides for a change or the loan is renegotiated.
Can a bank change the margin on a business loan?: It depends on the document. On a committed term facility, the margin generally stands for the term unless the agreement contains a ratchet, a review right or a change triggered by some event. On a facility repayable on demand, or one reviewed each year, the bank has more room to reprice at a review. A borrower asking for a waiver or an extension should expect the margin to be raised as part of the discussion.
Does fixing my interest rate fix the margin?: A swap fixes only the base-rate part. The margin continues to be paid on the loan and can still change if the facility allows it. A fixed-rate loan quoted as a single number has both parts inside it, and whether the margin can move during the fixed period depends on the terms. Where the rate is fixed by the bank, an early repayment may also bring a break cost, so the terms repay careful reading.
Is the credit margin the bank's profit?: No. Out of the margin the bank must pay any funding cost above the base rate, the average losses it expects on loans of that kind, a return on the capital it holds against the loan, and the cost of assessing and monitoring it. Profit is what remains. A margin that looks generous on a weak borrower can leave little behind, because a greater share of it is already spoken for by expected losses and capital.

// NEXT TO IT

// ON WHOSE DESK

The seats that read this term in an ordinary week. Each page says what the seat is for, who arrives in it, and the shape of the round it runs.

Treasury analystFunds the bank and manages the interest rate and liquidity risk created by its own balance sheet.
Product managerOwns what the bank sells rather than who it sells to — the design, pricing, terms and lifecycle of a lending, deposit or payments product.
Business relationship managerCarries a book of trading businesses — wins them, keeps them, and is the bank's voice when the answer is no.

THE IN-TRAY · ONE MINUTE

Make the call on one file.

A short file on the ground this page covers. Every option opens with how far it sits from a senior banker’s read.

THE NUMBER · THE LOAN · PRICE

A US$10m loan. The bank estimates a 2% chance the borrower defaults within a year, and expects to lose 40% of what is owed if it does.

What is the expected annual loss?

5 MORE ON THE LOAN · PRICE →WHERE DO YOU READ FROM? THE PLACEMENT →

THE READING ROOMIN ONE PARAGRAPHCredit margin What is the credit margin on a business loan, and what is it priced on?