Every day I speak with Lenders around the country and I ask them the simple question: What does a loan cost you? What’s your Cost Per Loan (CPL)?
I’m always surprised how quite a number don’t have a solution. For most, a loan in any form (Mortgage, MasterCard, personal loan, Micro-loan, Payday loan, Small bank loan, etc.) may be a product that’s being ‘sold’ to a customer. whether or not you accept deposits (Banks, Microfinance Banks, Credit Unions, etc.), some portion of your operations exists to style, build, originate, administer and repair loans. Every loan you sell must cover the prices related to its creation, packaging, marketing, sales, distribution and servicing.
While it’s common to look at other crucial aspects of lending like Portfolio Quality it’s not as common to determine lenders evaluating the standard of the inputs into the prices of these loans that became delinquent. The price isn’t only the Principal in danger it includes many other inputs that need tracking and analyses.
There has been some concern that CPL may unfairly punish lenders who lend small loans. It could, but it’s still worth understanding within the context of your specific business model.
Common Costs Associated with Loans
Loan costs should be spread across your portfolio and everyone new loan produced should be burdened by a proportional segment of these costs. you’ll allocate costs by loan products moreover. As an example, it’s common for little commercial loan products to need enhanced processing in comparison to ‘payday loans’.
- People costs related to selling/originating the loan product.
- General people costs related to the administration of the business. this might include the value of the owner/proprietor.
- Costs of Utilities
- Property Costs including Leases or Rents
- Technology Costs – If you’re manual then a value of inefficiency should be allocated.
- Cost of Capital
- Other Operating Costs
- Other Costs incurred within the production and/or servicing of the loan.
Common Ratios to highlight the ‘cost’ relationship
Cost Per Loan: Your fully burdened operating costs / Total # Active loans
Cost Per Branch: Your fully burdened operating costs / Total # Active Branches
Cost Per Borrower: Your fully burdened operating costs / Total # Active Borrowers
Cost Per Loan Officer: Your fully burdened operating costs / Total # Active Loan Officers
Beware of these cost drivers
We all know that it’s almost impossible to grow revenues during a cost-neutral way. Top-line sales growth would force more resources but resource growth will be managed smartly, especially with proper use of technology. Technology is often a core strategy in managing the expansion of costs as you grow your business.
Technology may be a special, reasonable cost. It behaves differently because it allows scale. Expert technology will allow you to super scale and to try and do it very quickly. But most technology costs require large capital outlay which isn’t the most effective use of capital when you’re within the lending business. In other cases, you’ll be required to think about pegging your actual revenues to the value of your technology. So there’s Presta that simply gives you an easy way to cost their service fees right into the CPL. This is sensible and it’s real scaling. You’re only paying as you grow but you’re not supporting something like your revenue. If you price your loans right, a price per loan model allows you to pass your core technology costs onto your customers. Yes, you’d discount your respective debt portfolio amount from receipts.
Conversely, not investing in technology is additionally a key cost driver. The price of inefficiency is extremely real. In an era of technology failure to invest in the right technology can be a threat to your lending business.
To Your Success!