What is A Loan Pricing Program?
Author: Frank Shields
Loan pricing plays a vital role in the lender's asset/liability management program with loan pricing decisions having a direct effect on credit risk and earnings. Lenders must price their loans appropriately, ensuring that all costs are covered, risk is accounted for and managed, and sufficient capitalization is available for the lender's long-term viability. In addition, the loan pricing must also consider competitor rates as well as meet the borrower's needs. Like other competitive products, pricing requires a delicate balance between meeting organizational and borrower needs.
Not only is loan pricing crucial to the financial institution's success, FCA regulations require lenders to have formal loan pricing policies in place that cover everything from loan types offered, factors involved in computing or adjusting interest rates, and compliance policies to methodologies for monitoring loan pricing and loan pricing policy compliance.
Lenders create internal loan pricing programs to ensure regulatory compliance as well as help loan officers make the best pricing decisions possible. While each institution can adopt their own methodologies, most loan pricing programs address the following factors:
-
Cost of funds — These costs are usually identified and determined by the bank's treasury department.
-
Cost of operations — These costs are the institution's operating costs such as rent, salaries, insurance, training, IT infrastructure, and so on.
-
Credit risk requirements — All loans are inherently risky, with some loans riskier than others based on the borrower's credit history and other factors. Credit risk requirements are used to ensure that interest rate charged reflects the level of risk assumed (i.e., riskier loans have higher interest rates).
-
Customer options — Loan pricing programs often allow for customer options such as caps on interest rates or prepayment rights. These options add risk which should be priced into the loan product.
-
Interest payments / amortization — How interest is applied to a loan and how the loan amortizes can affect earnings and profitability.
-
Capital investments or "loanable funds" — This refers to how much the lender has invested in loans, and thus, the amount it must borrow to fund operations along with its loan portfolio.
-
Capital and earnings requirements — Lenders must understand their capital and earnings requirements in order to establish an effective earnings strategy, which plays an important role in loan pricing.
Each lender has its own loan pricing program based on its unique needs and strategies. Some use simple methodologies (such as matching the competition) while others use more complex models. Loan pricing models can assist lenders in establishing loan prices. These often take the form of a spreadsheet or calculator program. The loan officer simply inputs information and the program calculates the appropriate loan rate based on the information contained in the pricing model such as interest rate, fees, projected loan volume, loan terms, cost of funds, operating expenses, and so on.
Specialized loan pricing software that goes much deeper than a simple spreadsheet or loan calculator is also available. Loan pricing software can ensure that the requirements established in the formal loan pricing policy are consistently followed. With such as system in place, loan officers can quickly price loans that comply with the institution's formal loan pricing policy.
Article Source: http://www.articlesbase.com/loans-articles/what-is-a-loan-pricing-program-6642420.html
About the AuthorFrank J Shields is the author of this article explaining what a loan pricing program is. Loan and mortgage software are the main drivers of loan pricing programs today and this article explains how they work.
More Resources
Unable to open RSS Feed $XMLfilename with error HTTP ERROR: 404, exiting
More Loan Information:
Related Articles
Short Term Loans...are they right for you?
With less than a week before she was to receive her next paycheck, Roni was faced with a problem that millions of Americans experience at some point in their lives: bills that are due and not enough cash available to pay them. Faced with a dilemma of late fees and a lower credit rating, many consumers with no options left turn to credit card advances as a stop-gap resolution for their problems.
Should You Get A Pay Day Loan?
Whether you have good credit, bad credit or no credit, you are still eligible for pay day loans. Pay day loans come in all shapes and sizes.
Secured Loans vs. Unsecured Loans - Choosing Between the Two Diverse Ends
Often in our search for finance options, we are led into a crossroad where we have to make a choice between secured and unsecured loans. Both are equally alluring and put the borrower in a difficult spot.
Bridge Loan
A buyer of a new home may find himself or herself in an awkward position when he or she is unable to come up with the promised down payment on account of the existing home not being sold before closing on the new home purchase. This puts the deal to buy the new home in jeopardy.
No Credit Check Payday Cash Advance Loan - Benefits to Using a Payday Loan
No Credit Check Payday Cash Advance Loan - Benefits to Using a Payday Loan Online if You Have Bad Credit HistoryAn online payday loan can help you rebuild your credit if you have a bad credit history. With no credit checks, you can be approved for a cash advance to keep on track with your bill payments or survive a financial emergency without ruining your credit score.
No Faxing Cash Advance Loans - 3 Reasons to Use A No Fax Payday Loan Company
No fax payday loan companies save you time with your application, grant instant approvals, and allow access to easy cash. Faxless applications eliminate the review by personal by relying on databases.
What is a Personal Secured Loan?
A personal secured loan is the generic term for a loan. In simple terms a personal secured loan gives security to the lender on the loan other than a simple promise to repay the loan.
Secured Loans - UK Overview
Borrowing money has become more and more popular in the UK over recent years, and this is partly due to the fact that it has become far easier to borrow money. The rising popularity of consumer finance has also been aided by the wide variety of deals and the low interest rates available these days.
Poor Credit Car Loan - Get Approved Online
Poor credit doesn't have to stop you from getting a car loan. In fact, car loans are one way of rebuilding your credit history.
Alternative Venture Finance: Federal Grants and Loans
While most companies seeking venture capital initially think about angel investors and venture capitalists, a large alternative source of financing is federal grants and loans. The two largest federal grant programs are run by the Small Business Administration (SBA), and by Small Business Investment Companies (SBICs).
A Personal Loan And Your Rights
You can use a personal loan for many different things including, but not limited to, paying off bills, taking a vacation, buying a car and much more. Interest rates on a personal loan will vary, depending on your credit rating and the institution you are choosing to get your personal loan from.
A Beginners Guide to Online Loans
If you're just beginning to look at online loans, you might feel that you're getting in over your head.Online loans have been growing in popularity in recent years, due in no small part to the ease and convenience of being able to apply for online loans from the privacy and convenience of your home at any time of the day or night.
What is a Home Loan?
A Home loan is the generic term for a loan. A home loan uses your home as security.
No Credit Check Personal Loans - If You Need Fast Cash, A PayDay Loan Online Is a Very Quick Process
Online payday loans can get you fast cash through a very quick process. By processing applications online and depositing money into your checking account through direct deposit, you can have your cash advance within hours.
Student Loans Are The Life Preserver Of The Education System
A loan is the reason many students are able to go to collegeand not have to worry about money until after they'vegraduated. There is a lot of paperwork involved in theapplication process of a loan, but once you've completed itand been accepted, it will have been worth it.
What is Credit?
Ever wondered what is credit? Credit is more than just a plastic card you use to buy things - it is your financial trustworthiness. Good credit means that your history of payments, employment and salary make you a good candidate for a loan, and creditors - those who lend money or services - will be more willing to work with you.
A Guide to Finding an Adverse Credit Homeowner Loan
If you're searching for an adverse credit homeowner loan, you might not know where to turn. After all, it seems like no one wants to give you the time of day if you have less than perfect credit, much less give you a loan.
What is a Bad Credit Personal Loan?
A UK Bad Credit Personal Loan is a loan designed for the many people with a bad credit rating. A bad credit rating can make your life a misery.
About Personal Loans
What are personal loans? They are unsecured loans that a borrower obtains for various purposes. This type of loan is often used to consolidate outstanding debt into one monthly payment, but it can be used for other things such as paying for a wedding, a vacation, or something similar.
Where to Look for a Fast Homeowner Loan
If you're looking for a fast homeowner loan, you might not know where to begin your search.Some banks and finance companies can take weeks to make loan decisions, and if you need a fast homeowner loan then that's time that you can't afford to spend waiting.