Loan-pricing models: What to consider for loan origination

Financial institutions that structure and optimize pricing for loans are able to make sure they are adequately compensated for the risk they are taking. Instead of pricing loans based on a “gut feel” or a request to match or beat competitors’ rates, institutions that utilize loan-pricing models for origination incorporate a more methodical approach.

Benefits Of Loan Pricing

This methodical approach can help ensure the best loan and terms are matched to the borrower so that the financial institution makes the sale and keeps the customer. Loan pricing models can allow banks or credit unions to set prices based on other institution goals, too, including goals related to profitability targets or loan portfolio composition. In talking with banks, Abrigo has learned these institutions thought a conservative estimate was that they could pick up an additional 5 to 10 basis points in interest if they had more structured pricing methodologies in place.

One overall benefit of effective loan pricing is that it is one of the many ways a financial institution can optimize capital. Optimizing capital is important because it provides institutions with the ability and freedom to deploy capital for developing new products and new markets, addressing regulatory issues or navigating shifts in the macroeconomic environment. “Institutions that optimize capital can be more flexible and agile,” said  Rob Ashbaugh, Senior Risk Management Consultant at Abrigo. “They can be more competitive and better prepared for changes on the horizon.”

 

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