A disagio is a negative difference between the face value of a security or loan and its actual, lower price. The term is often used in relation to personal loans and bonds. An agio, on the other hand, is a positive difference between the face value of a security or loan and its actual, higher market value.
A disagio is normally shown as a percentage of face value.
Example: A 4% disagio is applied to a 1000-franc loan. So the borrower only receives 960 francs (1000 – 4%*1000) paid out.
A disagio makes a loan more expensive for a borrower. Disagios are not accounted for in nominal interest rates, which are based on the higher face value. Because of this, they can potentially add a “hidden” cost to a loan. However, disagios are accounted for in effective annual interest rates.