There are inherent costs in lending that should be used to assess profitability. Credit risk, servicing expenses, cost of funds, and other expenses must be quantified to measure a net return. In many cases, lending costs will vary by product type and borrower risk profile, such as credit tier. 

Different types of loans should be evaluated net of expenses and compared to similar investments to evaluate opportunity cost. Once the model has determined net yield across credit tiers and product types, we provide customized investment benchmarks to help determine if the loan offering meets strategic guidelines.

If a loan is underpriced management can adjust future pricing or assess the value of obtaining the member relationship. We can choose to make a loan at a lower return, but we had better know why we are doing it.

A rapidly changing interest rate environment has significantly impacted credit union cost of funds and pricing strategies. Loan rates should be updated at least monthly to account for changes in credit performance, cost of funds, and available investment alternatives. Accolade’s Dynamic Loan Pricing Workbooks can help you team quickly assess projected lending costs when setting new loan rates, and our loan analytics model offers a forward-looking view of credit risk.