THE BUSINESS APPLICATION
Where and how to use it
Use it to compare amount, tenure, pricing and security options, or to review whether a product covers the resources it consumes. Alternatives should be compared on the same cost, horizon and risk assumptions.
A longer-tenure offer generates more scheduled interest but ties up funding and extends exposure to default. Comparing net present value makes that trade-off visible before the business treats higher interest receipts as higher profit.
From evidence to a decision
- 01Expected receiptsPrincipal · interest · fees
- 02Funding and costsServicing and acquisition
- 03Risk and timingLosses and early closure
- 04Net contributionCompare like-for-like offers
DATA REQUIREMENTS
What records does it need?
These are the records your team would bring together for this analysis. The exact fields and history needed depend on your lending products, the question you want to answer and the period you want to assess.
| Record category | What it contains | Why the detail matters |
|---|---|---|
| Loan cash flows | Principal schedule, interest, fees and expected timing. | Separate contractual from expected receipts. |
| Cost assumptions | Funding, servicing, acquisition and recovery costs. | Document allocation basis, currency and dates. |
| Risk and timing | PD, LGD, EAD and prepayment assumptions where used. | Keep definitions and horizons consistent. |
Past loan outcomes help assess how well an estimate reflects your borrowers. For a new decision, use only the information available at that time; later repayments help you review the result afterwards.
Understand data readiness →WHAT YOU RECEIVE
The output
Expected contribution or net present value, a component breakdown and sensitivities to price, cost and term changes.
WHAT TO WATCH
The limitations
A profitable projection is conditional on assumptions. Changing a price does not prove a causal change in demand or borrower behaviour.
FOR RISK & ANALYTICAL SPECIALISTSHow the analysis works+
The modelling approach
Expected cash flows are discounted under stated conventions. Credit loss may be represented in the cash-flow path or as a consistent loss adjustment, but must not be deducted twice. Optional fitted components need their own evidence.
What your risk team should review
No double counting, consistent discounting, cash-flow reconciliation and explicit cost allocation.
The right approach depends on your portfolio and available history. Review the fit to your borrowers, the reliability of the estimates and the effect of missing information before using the result in a lending decision.