What is a currency spread and how to reduce it?

Currency spread – sounds complicated? You don’t need to worry that this term is reserved only for financial experts. The currency spread affects everyone who exchanges money: for travel, shopping in foreign stores, or simply because you’re repaying a loan in a foreign currency. Understanding its meaning can help you save a lot of money!

In this article, I will explain what a currency spread is and why everyone using currency exchange should understand it. You will learn how to calculate its value and what tricks you can use to reduce the costs of exchanging money.

What is a currency spread?

Currency spread – definition

The currency spread is nothing more than the difference between the buying and selling rates of a currency. When you visit a bank or an exchange office, you will see two values for each currency – the buying rate and the selling rate. The buying rate is the price at which the bank or exchange office buys the currency from you, while the selling rate is the price at which you can buy the currency from the bank. The spread is the difference between these two rates.

Example of a currency spread

Let’s assume that Bank A offers a selling rate for the euro at £4.50 and a buying rate at £4.10. The difference, or spread, in this case, is £0.40. This difference is the amount the bank earns from the currency exchange. The larger the spread, the higher the cost you incur as a customer.

Types of currency spreads

It is worth knowing that a currency spread can take different forms. A fixed spread is one that does not change regardless of market conditions. A variable spread, on the other hand, depends on market conditions and can be higher or lower depending on the time of day. The market spread refers to the forex market, where the financial institution’s margin is not included, while symmetrical and asymmetrical spreads show how buying and selling rates are set in relation to the average rate.

Why is it important to know the currency spread?

The currency spread directly affects the cost of exchanging currencies. If you plan to travel, repay a loan in a foreign currency, or simply exchange money for everyday shopping abroad – you need to know how much such an exchange costs you. Financial institutions set the spread according to their own rules, which means that offers can vary greatly.

A high spread means a higher cost for the customer. If you don’t compare offers, you could accidentally overpay by as much as several percent. The spread particularly affects people who regularly exchange currency, such as those with mortgage loans or investments. For example, Frank, who exchanged £100 for euros, lost £9 because he didn’t check the offers at another bank where the spread was lower.

How to calculate the currency spread?

Calculating the currency spread is easy and doesn’t require complicated tools. Simply subtract the buying rate from the selling rate. For example, if the selling rate for the dollar is £4.02 and the buying rate is £3.71, the spread is £0.31, or 31 pence.

The spread can also be expressed as a percentage using a specific formula. This allows you to better assess how much the currency exchange actually costs you. For example, if the spread for the dollar is £0.31, it can be converted to 7.99% of the transaction value. This knowledge helps you consciously choose the best offers.

Factors influencing the size of the currency spread

The size of the currency spread is not random and depends on many factors.

• Demand for the currency – popular currencies like the euro or the dollar have lower spreads, while exotic currencies are more expensive.
• Stability of the exchange rate – currencies with large exchange rate fluctuations will have a higher spread.
• Market competition – if there are more exchange offices and banks in the market, you can expect lower spreads as institutions compete for customers.
• Type of transaction – cash transactions often have higher spreads than non-cash transactions.
• Transaction location – banks and physical exchange offices typically offer higher spreads than online exchange offices due to the costs of running a business.

How to reduce the currency spread?

Fortunately, there are several ways to reduce the costs of currency exchange.

1. Compare offers – checking currency rates at several banks, physical and online exchange offices can bring significant savings. Online exchange offices usually have lower spreads than physical ones.
2. Avoid hidden costs – some institutions offer a low spread but charge high fees for transfers or other services. Before making a decision, it’s worth knowing the total cost of the transaction.
3. Choose the right time – if you don’t need to exchange currency immediately, it’s worth waiting for a better rate. You can also set rate alerts to notify you when the rate reaches the desired value.

Foreign currency loans and the currency spread

The currency spread is crucial for foreign currency loans, especially for borrowers with loans indexed or denominated in currencies such as the Swiss franc. In both cases, the spread determines the cost of converting the loan amount and the principal-interest installments.

In 2011, the anti-spread law introduced changes that limited the ability of banks to manipulate the spread. Since then, borrowers have been able to repay loans directly in foreign currency, using cheaper exchange offices or transaction platforms. This allowed them to avoid inflated spreads, which reached up to 6-7%.

Summary

Understanding the currency spread can bring significant financial benefits. It is worth regularly monitoring the currency market, comparing offers, and looking for the most favorable exchange options. The currency spread is not just a cost but also an indicator of where it’s worth exchanging currency. Remember, even small savings accumulated over the years can lead to real benefits.

FAQ – What is a currency spread and how to reduce it?