CORONADO, Calif. — The biggest mistake a credit union can make: allowing your competition to price your loans.
That was the message from Dan Roderick of ProfitStars' Margin Maximizer Group, who noted that most financial institutions make this same mistake every day: basing its pricing on what the competition is doing.
What credit unions should be doing, he said, is using a formula that takes into account the terms, the risk and other factors to ensure that every loan is priced to perform for the credit union.
"You need to know exactly how and why you price your loans, and you need to make sure the deal is good for the member, but also for the credit union."
Roderick said every credit union should be able to answer the following questions, but very few can do so:
1) Do you know the profitability of each loan and each loan type?
2) Do you know how to price A paper so it is still profitable (i.e. how low can you go?)
3) Do you have a method for valuing deposits?
4) Do you have a method for determining how much your rates should vary based on the size of the loan?
5) Do you have a practical approach to pricing for credit risk?
The only way to be able to answer these questions, Roderick suggested, is to have tools that allow you to create a truly empirical method to price your loans.
ProfitStars is part of Jack Henry & Associates.
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