Risk and reward – Consider these factors when pricing commercial loans
Abstract: Many community banks take a “seat of your pants” approach to pricing commercial loans. A better way is risk-based pricing, which allows a bank to effectively judge whether the pricing is sufficient to cover its costs and risks. This method also does a superior job of customizing prices based on the borrower’s credit profile and relationship with the bank and the loan’s terms. This article addresses the various loan risks, and how costs factor in. A sidebar briefly discusses how costs factor into the picture of a loan’s profitability.