I live in a suburb of Chicago, but talk to bankers from all over.  Finding the right Loan Pricing Model is a herculean responsibility faced by the officers of community banks and credit unions. The hazard of applying an incomplete model as a solution compounds the risks of imperfect information about the assets that borrowers offer as security.

Illuminating Loan Quality

Lenders need accurate data and a clear understanding of the impact that it will have on portfolio profitability. The option often taken by smaller banks is to respond by pricing based on the apparent market rate, without regard to any internal pricing rubric. Such a haphazard system may account for the prevailing market rate, but it fails to establish a loan’s quality before adding it to the balance sheet. This lacks information about loan profitability, essentially making it a shot in the dark.

Lenders apply Loan Pricing Models in several situations that improve portfolio profitability. An effective model can help to set the right terms for a loan, as well as to determine existing loan quality on the balance sheet; distinguishing high-quality loans from poor performers.

Community banks and credit unions do have valid reasons for being reluctant to apply pricing models to loan selection and management. The cost of hiring outside services has been one of those factors. The uncertainty of the accuracy of the models and lack of expertise stand out as others. Attempting an in-house solution is has even more risk associated with it.

Loan Pricing Models Support Profitability

With the right loan-pricing guidelines and model in place, your institution will be able to determine the best quality loans to pursue and the right terms to apply for each lending proposal. It will also help to determine the impact on your balance sheet of outside changes such as interest rate increases by the Fed and what direction to set for improved profitability.

In banking and commercial lending, Loan Pricing Models are excellent tools to determine the rate and terms to offer on commercial loans, if you can set them up them correctly. A well-designed model can also help the lender target it’s lending to increase profitability and reduce sensitivity to interest rate risks. We will build your solution from a broad knowledge base. When you need the best practices loan pricing guidelines contact us for the solution that shines the light of understanding to your commercial loan price setting and portfolio.