Credit Unions are closely examining their operational expenses. One of the key areas where cost efficiency can be achieved is in the selection and budgeting of a Loan Origination System (LOS). With a thorough understanding of both direct and indirect costs, credit unions can optimize resources, streamline workflows, and improve their bottom line. Here are important factors to consider when budgeting for an LOS.
Identifying direct and indirect costs
When budgeting for an LOS, start by understanding both direct and indirect costs: these significantly impact the overall costs.
Direct costs
Direct costs typically include transaction-based charges, user licenses, and other fees that vary with the system provider. Common direct costs to consider include:
- Transaction charges: Application processing, e-contracting, dealer portal fees, and any charges related to integrations with third-party providers: core servicing system, dealer portals, AI providers, and other significant providers to your operations. Determine how these fees are incurred: are they annual and/or monthly, transactional, per application, or per funded loan.
- Document storage and imaging fees: Cloud-based systems may incur document storage fees, often based on the volume or size of documents processed and stored.
- User licenses: Assess how many user licenses you’ll need, as license costs can vary significantly between systems.
Indirect costs
Indirect costs include hidden or recurring expenses that can add up over time. For instance:
- Employee savings and efficiencies: Compare the cost savings in headcount by analyzing average salaries for roles such as underwriters, loan officers, and financial service representatives. The right LOS can save staff time by automating manual tasks, reducing overall salary costs.
Using current data can add weight to this analysis. For example, if the average salary for an underwriter is around $70,000, calculate potential savings by reducing the workload by a certain percentage through workflow and automation decisioning. Additionally, the credit union can become more scalable and grow its portfolio without additional headcount.
Assessing recurring and incremental fees
Many LOS providers increase charges annually, often by up to 5% or more depending on economic and other variable conditions. This is especially important during budget season, as these incremental increases can strain long-term budgets if not accounted for upfront. Common recurring costs include:
- VPN and network security charges: These costs are often overlooked but are essential for securing data.
- Support and upgrade fees: Verify what levels of support and system upgrades are included in your LOS agreement. Systems that require additional fees for professional services or technical support can lead to unexpected budget overruns.
- Integration fees for core systems and third-party services: Look at costs associated with connecting your LOS to core servicing systems and third-party providers (like gap/warranty providers, credit bureaus, and credit card systems). These fees may differ depending on your provider’s flexibility with integrations.
By tracking these incremental costs, institutions can better forecast total expenses and compare them to an LOS provider’s per-funded loan fee model, which often provides greater transparency and predictability.
Calculating a true per-application cost
After identifying both direct and indirect costs, the next step is calculating a true per-application cost. To do this, consider:
- Total number of applications processed annually: Estimate the volume of loans processed, factoring in the average auto loan amount. For instance, if the average auto loan is $25,000 and interest rates are 5%, calculate the revenue potential and assess the LOS’s impact on ROI.
- Comparative analysis of per-funded loan charges: Some LOS providers may charge a fee per funded loan rather than per application. This approach can lead to more predictable costs, increased lending growth through cross-sell, more evaluation of off-prime credits, and simplify budgeting compared to providers with variable, transaction-based fees.
For example, if the average revenue generated from an auto loan is approximately $1,300 (based on a $25,000, 5% APR, 60 month term, and considering average early payoff of 26 months), compare this against the cost of each loan processed using your current LOS. Determine if shifting to a per-funded charge could provide a clearer path to profitability.
Planning for future growth and scalability
Lastly, consider the scalability of your LOS. Does your provider offer a cost structure that supports growth without proportionally increasing expenses? Many credit unions are focusing on growing their loan portfolios, and an LOS that scales efficiently can reduce the need for additional user licenses, document storage, and processing costs as application volume rises.
Conclusion
Now is the ideal time to evaluate your LOS costs, both seen and unseen. By calculating true per-application expenses, considering future scalability, and comparing per-funded loan charges, credit unions can make informed decisions that align with their strategic goals.
As you assess budget options for loan origination, it’s important to focus on solutions that simplify the process and provide clarity in comparing and managing LOS costs. Credit unions often face unique challenges and budget considerations when evaluating systems. Industry solutions now enable financial institutions to deploy lending products efficiently, leveraging tools like auto-decision engines that streamline workflows, enhance loan revenue, and capture new market share—all while minimizing complexity.
Ready to make budgeting for your LOS easier? Schedule a demo today to see Sync1 Systems in action! Visit our website to learn more about how our solutions can empower your credit union this budget season.