Expected Profit Charts for Lenders

In our dedication to ensuring that lenders maintain profitability, we have offered the lenders a helpful chart in the Dashboard which shows their expected profits vs their actual profits. The goal is to encourage lenders to utilize our risk-based pricing and to visualize how their profitability would be affected, had they used our pricing model.

Risk-based Pricing Matters

It can be difficult for lenders to determine exactly how will their profitability change if they use the risk-based pricing. Here is a link to the credit scoring and the pricing for each credit grade: https://loanbase.com/credit-rating

Our goal is to help lenders visualize their profitability and use this chart as a benchmark, which they can try to match as they’re investing. We have seen that lenders systematically price the risk incorrectly, so we’re actively pushing the lenders to utilize our risk-based pricing in order to maximize their profits or to stay profitable (if they’re not already).

Here we have a lender who is already profitable, but if they had invested via risk-based pricing, their profits would have been an average of about 40% in the past 3 months.

ExpectedProfit2

Lenders who are posting a loss can also see a significant improvement in their portfolios. In the example below, you will notice that the lender has experienced losses up to 15.83%. With our risk-based pricing, that same lender would have posted profits up to 16.98%.

ExpectedProfit

Is the Pricing Realistic?

Some lenders have expressed concerns whether the pricing is too high. If the pricing is too high, then only scammers would take the loan and it would have no effect. However, the pricing is a direct correlation to risk. If the loan is priced at an interest rate which is unusually high, then the lenders should invest with caution. If the pricing seems excessively high, then what we’re trying to do is compensate for a substantially higher risk. The recommendation in such cases is that lender should simply not invest in those loans, invest less, or simply not invest at all. Common sense should prevail: if a borrower is asking for a 30 day loan and the interest rate recommended by our platform is way above what’s reasonable for a legitimate borrower, then the lender is probably not dealing with a legitimate borrower.

Diversification

At the end of the day, we should look at risk-based pricing in the correct perspective: risk-based pricing is only helpful if the lenders are maintaining a well diversified portfolio. If the lender doesn’t diversify well enough, then the risk-based pricing will not be able to help them. The best way to diversify your portfolio is to invest small and even amounts into multiple loans, which match your risk appetite.

 

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