Lessons About The Commercial Loan Pricing Model
Commercial loan pricing model
A commercial loan pricing model is used in a lot of commercial lending scenarios. Only about 15 percent of the banks with $1 billion or less in assets use the model, however. For those with assets less than $250 million, the percentage is even smaller.
There may be various reasons as to why a bank doesn’t use a commercial loan pricing model, including:
- Cost of acquisition
- Lack of expertise to implement
- Distrust of a black box
- Belief that a model is not needed
Some of the lessons you can learn from a commercial loan pricing model can help you choose the right borrower and avoid pitfalls.
Credit is important, but it’s not linear. This means that the net interest margin (NIM) is not linear with the credit. When there is a lower credit score, there is more NIM needed and any credit that is higher becomes insensitive to credit loss.
Size Does Count
The size of the loan counts. While many loans are under $500k, the ones that are more than that amount are usually more profitable.
Relationships are Key
Lines of credit generally lose money and therefore a loan is considered only a part of the entire relationship that can be established.
Terms are always important. The basic math of a loan needs to be considered. The loan is least profitable on day one and most profitable when the loan is repaid or it matures.
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