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Pricing Commercial Loans to Meet the Competition

Many commercial loans are priced to meet the competition with little regard to the overall profitability to the institution.  Competition is certainly an important component, but should not be the only one.  To price to the competition is to say that the competition is pricing the loan appropriately to meet the needs of your institution, which is most probably not the case.  The appetite for loan growth, source of funding, amount of funding, credit standards, etc., are a few of the issues that make one institution different than another in the pricing of its commercial loan.  This being the case more institutions need to have analytical methods to determine the profitability of newly originated commercial loans and use them as a basis for determining loan pricing.  A loan may still be priced to meet the competition, but at least the organization knows the impact of the pricing to its profitability.


Phill Rowley