The Pitfalls of Commercial Loan Pricing: What Bankers Need To Know, And Avoid
Commercial Loan Pricing
Believe it or not, there are a lot of pitfalls in commercial loan pricing, and in this blog, we’re going to discuss them, and how you can avoid them.
Many banks today use a spread-based pricing model instead of a risk-adjusted return on capital (RAROC) model. Approximately 15% of banks who have under $1 billion in assets use either an in-house or a purchased loan pricing model, and of those, the number that currently use a true RAROC model is insignificant.
Another thing to remember is that it costs a bank as much to originate a loan for $100,000 as it does to originate a loan for $1 million — this is because many banks have fixed origination loan costs. This means, of course, that larger loans are more profitable for banks. In fact, for many banks, a loan that is less than $500,000 often results in a negative ROE for the bank.
Finally, bear in mind the most important pitfall: even if a loan is over $500,000, it’s not exactly profitable for a bank. In fact, the vast majority of loans lose money because of the various administrative costs and other risks involved in the lender profile.
The Hurdle Group provides banks with a competitive advantage through better pricing of their commercial loans. As a banker, you can increase your profitability on your commercial loan portfolio by optimizing your loan rates and terms. For more information about our services, or to request a consultation with one of our experts, contact us today. We are pleased to serve bankers in the USA.
Contact us at The Hurdle Group to learn more about the services we can offer including our own model: PULPS.