Loan Pricing Ought to be More Scientific Than Just Checking Out the Competition
in League Initiatives
By: David Frankil, NJCUL President/CEO

Setting the right price for a product or service is a challenge for any business. Set prices too low, and you negatively impact margins and starve the business of capital – in the extreme, fixed and variable costs might not be covered. Set prices too high, and sales suffer and the business itself might be threatened.

Discuss prices with your competitors, and you might become a long-term guest at a Federal institution not of your own choosing.

Understanding price elasticity of demand – the relationship between price and quantity – is a challenge that many large companies spend millions of dollars trying to understand.

For credit unions, there is an added component that comes with the financial services territory – risk. The risk that a member might default on a loan plays (or should play) a role in determining the interest rate that borrower should pay, which is just as important as understanding the true cost of capital in making pricing decisions.

Two common decision-making processes that fail to adequately account for risk in pricing decisions –

  • What are my competitors’ rates?
  • One-size fits all approach 

It is also an equity issue – unless you adapt pricing strategies that differentiate based on risks, then members with great credit who pose a low risk will be subsidizing members with a less-than-stellar credit history. Even worse, you’ll be over-charging the former and under-charging the latter.

In this scenario, you run the risk of losing your best members to other institutions that do vary pricing based on risk.

There are many factors that go into making risk determinations, including credit scores, and the process can get complicated. Luckily, there are well-established tools that help in setting risk-based prices. 

To help credit unions understand and implement the Risk Based Pricing model, we’re co-hosting a one-day workshop on the topic of “Risk Based Pricing Strategies/Managing Loan Portfolios” at our offices in Hightstown, on Wednesday, January 11, 2017 and at Bridgeton Onized FCU on Thursday, January 12, 2017.

Presented by Randy Thompson, founder and CEO of TCT Risk Solutions, attendees will: 

  • Explore lending regulations to better understand what is required of your credit union
  • Develop a clear definition of Risk Based Pricing and how it compares to tiered pricing
  • Practice using multiple profiles to determine loan underwriting
  • Learn how to set loan rates to maximize your credit union’s profitability
  • Examine effective strategies for the ongoing management of your loan portfolio

Thanks to Randy’s sponsorship, the cost is just $25 and includes lunch. A special “Tools Review” session will be held on the evening of Wednesday, January 11th at the League from 5:00 to 7:00 p.m. targeted for board/volunteers.

Learn more at:

Risk Based Pricing Strategies at NJCUL on Jan 11th: http://www.cvent.com/d/4vqcb2

Risk Based Pricing Tools Review at NJCUL on Jan 11th: http://www.cvent.com/d/wvqrjq

Risk Based Pricing Strategies at Bridgeton Onized FCU on Jan 12th: http://www.cvent.com/d/0vqckc

For more information, contact Barbara Agin, NJCUL Vice President of Member Experience and Education, at bagin@njcul.org or 800-792-8861 ext. 111.