Cost-plus loan-pricing model
This model deals with the basic calculation of the price of a loan. It doesn’t involve hefty mathematical analysis and is based on four different components:
- The funding cost incurred by the bank
- The operating costs of servicing the loan
- A risk premium
- A profit margin
Lender should add all the figures of the components stated above to find the price of a particular loan. It is one method to evaluate the cost of loan.
Credit scoring deals with the credit rating offered by the companies that are internationally recognized to rate different types of financial institutions. Moody's Investors Service is one of the most famous organizations that award a credit rating to each financial institution. Hence, a lender should check out the credit rating of the firm and then give weightage to each firm according to his/her own wish.
Credit scores are already calculated by now. They will be used in this model as well. In this method, a lender should appoint particular risk to the borrower. The amount of risk is based on the credit history of the borrower as well as the amount of collateral that is offered for the deal.