Making Effective Loan Pricing Decisions
- Topics:
- Pricing Strategy
- Source:
- Farin & Associates
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Overview: The key to effective loan pricing is to develop a consistent methodology for pricing loans that identifies which loans are well and poorly priced. Don’t get into rate wars on poorly priced loans. Use rate to increase volume of well-priced loans. A number of analytical approaches have been used over the years in setting loan rates. The most commonly used process is familiar to many of us. Begin with the cost of funding. Adjust the funding cost for the duration of the asset. Add the spread needed to cover operating expenses, credit risk, and meet ROA targets. The sum becomes the rate charged on the loan. All this comes with a fancy term and a significant implementation cost. This approach is very beneficial and yields an effective result.
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Format: HTML | Date: Jan 2003 | Pages: 1
