Price loans by risk band
Enter your risk bands, their share of lending, probability of default and today's rates. See the rate each band needs for your target margin in a minute, then copy the table into an automated credit decision.
Profit today
2 of the 6 bands lose money at today's rate; they are 17.0% of the lending and lose €182,400 a year, which the other bands pay for.
Profit at the new rates assumes the same lending in every band; it excludes applicants who leave when a rate rises or arrive when it falls.
Rates needed and rates today
Bars show the rate each band needs for the margin, dots show today's rate, and the dashed line shows the highest rate allowed.
Rates by band
| Score band | Share of lending | Probability of default | Break-even | Rate for margin | Price | Rate today | Margin today | Profit today | Profit at price |
|---|---|---|---|---|---|---|---|---|---|
| >=760 | 15.0% | 0.60% | 8.47% | 11.49% | 11.49% | 14.00% | 5.50% | €164,880 | €90,000 |
| [720,760) | 25.0% | 1.20% | 8.95% | 11.98% | 11.98% | 14.00% | 4.99% | €249,600 | €150,000 |
| [680,720) | 25.0% | 2.50% | 10.00% | 13.08% | 13.08% | 14.00% | 3.90% | €195,000 | €150,000 |
| [640,680) | 18.0% | 5.00% | 12.11% | 15.26% | 15.26% | 14.00% | 1.80% | €64,800 | €108,000 |
| [600,640) | 10.0% | 9.00% | 15.71% | 19.01% | 19.01% | 14.00% | −1.56% | −€31,200 | €60,000 |
| <600 | 7.0% | 20.00% | 27.50% | 31.25% | 30.00% * | 14.00% | −10.80% | −€151,200 | €28,000 |
| All | 100.0% | €491,880 | €586,000 | ||||||
| * A band marked with a star needs a rate above the highest rate, so its price is capped there and its margin falls below target. | |||||||||
The copied cells paste into a decision table as two columns: the band is the condition and the price is the result.
Get the result by email
Run the band-to-rate table in the credit decision, then replay a rate change on past applications before it goes live. Start free
Show calculation
Margin at rate = (1 − Probability of default) × Rate − Probability of default × Loss given default − Cost of funds − Running cost Rate for margin = (Target margin + Cost of funds + Running cost + Probability of default × Loss given default) ÷ (1 − Probability of default) Break-even = (Cost of funds + Running cost + Probability of default × Loss given default) ÷ (1 − Probability of default) Price = min(Rate for margin, Highest policy rate) Profit today = Share of lending × Annual lending × Margin at rate (Rate today)
A loan that defaults is treated as paying no interest and losing its loss given default. The calculation covers one year at a time, with a flat default rate and no fees, prepayment or capital charge.
Risk-based pricing by band
Risk-based pricing sets an interest rate for each risk band. The calculator uses each band's probability of default and loss given default, along with cost of funds, running cost and target margin.
A single rate can leave safer bands paying for losses in riskier bands. The table shows each band's break-even rate and the rate needed for the target margin, so you can compare them with today's rates and use the results in a decision table.
Pricing questions
What is risk-based pricing?
Risk-based pricing sets interest rates by risk band. This calculator works out the rate each band needs for a target margin using its probability of default and loss given default, along with the lender's costs.
How do I price a loan by risk band?
Use each band's probability of default and loss given default, plus cost of funds, running cost and the target margin. The calculator works out the rate each band needs and compares it with the lender's highest policy rate.
How do I calculate a break-even interest rate?
The break-even rate is the rate at which the margin is zero. The calculator works it out for each band using its probability of default and loss given default, along with cost of funds and running cost.
Why can one rate lose money across risk bands?
A single rate can leave safer bands paying for losses in riskier bands. Riskier bands can lose money at a rate that looks healthy across the book.
What happens when a band's rate exceeds the policy ceiling?
The band is priced at the highest rate allowed by the lender's policy. Its margin at that rate may fall below the target or below zero.