Loan Pricing Model
Loans are the primary way that banks make money. By lending money to customers and charging them interest on it in return, a bank is able to generate revenue that it is able to put back into the bank, or loan back out to other customers. Without loans, banks would only be making money on fees and fines, and the bank would probably not have many customers if they were relying on high fees for making money.
But how does a bank know how to properly price a loan so that they are able to get and retain new customers and hold onto old customers, while still making as much money as possible off of the interest? A loan pricing model will help the loan officer better understand how to set the terms and conditions and interest rate on the loan so that there will be continued business with the customer.
A loan pricing model will be based on good data from a variety of sources. A big bank will have access to records going back years that can be mined for this data. A smaller bank may have to rely on other methods to obtain the data. Risk needs to be considered when making a loan. This is where credit reporting comes in, along with the customer’s financial information. The bank does not want to make a loan to someone who is unlikely to repay it, so carefully assessing the situation surrounding the risk associated with making the loan is a must.
The Hurdle Group has the tools to help your bank make the decisions that go into how to properly build a loan pricing model. If you are interested in working with us, please contact us and we can set up an appointment to help you better understand loan pricing models.