Borrowing
Why Lenders Price The Same Borrower Differently
Two lenders can look at identical information and quote very different rates, because each is pricing against its own funding costs, loss expectations and appetite for a segment.
The same application can produce a cheap offer from one lender and an expensive one from another, with no difference in the information supplied. Pricing is a property of the lender, not a property of the borrower.
A rate is built from several separate costs
Every consumer loan rate is assembled from components. The lender pays for its money, expects a proportion of lending to go bad, carries the cost of running the operation, and adds a margin.
Those components differ from firm to firm. A bank funded by deposits pays for money differently from a lender funded on wholesale markets, and that gap shows up in the quoted rate.
Because the components are added rather than negotiated, two lenders can reach different answers without either being wrong. They are solving the same equation with different inputs.
Loss expectations are set by a lender's own history
The expected loss on a loan is estimated from how similar borrowers behaved in that lender's past book. Each firm has its own history, and its own definition of similar.
A lender with years of data on a particular kind of applicant can price that group finely. A lender with little experience of the same group prices cautiously, which usually means higher.
This is why an applicant who looks unremarkable to one firm can look uncertain to another. The file has not changed; the reference population against which it is read has.
Appetite changes what a lender is willing to write
Lenders set targets for how much they want to lend and to whom. When a firm wants growth in a segment, it prices to win business there and relaxes marginal cases.
When the same firm wants to shrink, it does the reverse, and applicants who would have been accepted months earlier are quoted rates that are effectively a polite decline.
Appetite moves with funding conditions, arrears trends and regulatory pressure, none of which the applicant can see. It explains why offers vary over time as well as across lenders.
Risk-based pricing puts the borrower into a band
Most consumer lenders price in bands rather than individually. An assessment places the application in a tier, and the tier carries a rate that applies to everyone inside it.
Small differences in a file can therefore produce no change in price at all, and then a large change when a band boundary is crossed. The steps are invisible from outside.
Where risk-based pricing is used, advertised rates are typically available only to part of the accepted population, and rules on how that must be disclosed differ by jurisdiction.
Distribution costs sit inside the price
A loan sold through a broker or a comparison site carries an acquisition cost that a direct application does not. That cost has to be recovered somewhere in the pricing.
Lenders also price for the mix of applicants a channel sends them. A channel that delivers heavy shoppers and thin acceptances is more expensive to serve than a captive customer base.
The result is that the route an application travels can matter as much as the file behind it, which is rarely visible in the offer itself.
Questions readers ask
Is a decision in principle a guarantee?
No. It is an indication based on unverified information and a credit check. Full underwriting, valuation and fraud checks follow, and any of them can change the outcome.
How long does one last?
Typically a matter of months, with the expiry stated on the document. After that the assessment is redone, and lender criteria may have moved in the meantime.
