Setting your Rates According to Your Competition?You are Flirting with Disaster
Could you use CostPro Suite- Loan Pricing Tool more effectively?
Would you benefit from improved yields on your loans?
Are you preparing your loan rates for a rising rate environment?
Loan Pricing Tool
Specials and Matching
August 1 • 2018
11 am PT • 12 pm MT
1 pm CT • 2 pm ET
Our experience at TCT Risk Solutions, LLC (TCT) shows far too many credit unions set their interest rates primarily by looking at their competition. As a result, many credit unions are oblivious to the fact that their loan programs are operating at a loss. Consequently, they are unknowingly subsidizing their loan programs through fee income. Credit unions who operate this way are flirting with disaster since fee income could be reduced dramatically through competitive events or regulatory changes. Credit unions should not use fee income to subsidize their lending programs nor should they price by watching competitors. TCT’s Risk Based Loan Pricing tool assures loan portfolios are profitable and self-sufficient.
Many Credit Unions Are Still Desperately Trying to Grow Their Loan Portfolios
Although a number of larger credit unions have enjoyed growth in their loan portfolios, many mid-size and small credit unions are using creative methods to increase their loans. Sadly, these creative methods most likely involve pricing their loans cheaper than their competitors.
Credit Unions Often Price “Loan Specials” by Simply Undercutting their Competitors’ Rates
In their quest to grow loan portfolios, many credit unions offer “loan specials” to bring more loans in the door. Few give consideration to the fact that they may be losing money on each new loan they make.
Worse, for Many Credit Unions, Their Long-Term Strategy for Setting Rates Mostly Involves Matching the Competition
When it comes to pricing loans on a basis longer term than “loan Specials”, credit unions simply poll their competition and use competitors’ rates to set their loan rates. Some credit unions use an average of their competitors’ rates as a baseline for setting their rates. Others, most foolishly, undercut the cheapest of their competitors.
Using Competitors’ Prices to Set Your Credit Union’s Prices is an Unwise Practice
No two competitors have the exact same cost structure especially for borrowers of different risk levels. There is no assurance that using the competition’s pricing will lead to profitability and/or avoid the unfair practice of one class of borrower subsidizing another. Furthermore, no two competitors have the same strategic plans, equity positions or charge-off rates. For these reasons, credit unions should not use their competitors as a base line for setting their rates.
When Looking at Your Competitors’ Prices, Also Look at Their Processes
After management has determined what their rates need to be (using empirical methods) to meet minimal profitability goals, it is wise for management to look at competitors’ rates and processes to determine the viability of the program under consideration. By using “what-if” simulation tools, credit unions can determine if a particular loan product or program has the potential to be viable in light of the competition. Using interactive “what-if” simulation tools, managers can determine what changes will need to be made to loan programs to make them profitable under the pricing scheme being considered.
It is Imperative Credit Unions Price Their Products using Empirical Methods
TCT’s Risk Based Loan Pricing tool is superior to others in that it
(1) uses a credit union’s unique lending costs to establish a base for pricing;
(2) is empirically established using a credit union’s unique present and past loan loss data by loan types and credit scores;
(3) is statistically validated regularly;
(4) allows managers to perform “what-if” exercises to test various loan rates and their impact on profitability.