Definition (1):
Cost-plus loan pricing is figuring the rate of interest on a loan by adding together all interest and noninterest costs associated with making the loan plus margins for profit and risk.
Definition (2):
According to wiki.treasurers.org, cost-plus loan pricing refers to-“1. The interest rate on a loan expressed as a function of some publicly available cost-of-funds measure. “ As for example, LIBOR (London Inter-bank Offered Rate). Or
“2. The principle that borrowers should make good any increased costs or losses incurred by the lender.”
Definition (3):
Cost-plus loan pricing indicates a very simple model for loan-pricing assuming that the interest rate charged on a loan consists of 4 components:
- The cost of funding experienced by the bank for raising funds for lending, irrespective of such funds are gathered from deposits of customers or different money markets.
- The costs of operating for servicing the loan. These costs consist of application and payment processing costs, and the bank’s expenses of salaries, wages, and occupancy.
- A profit margin on such loans that give the bank a sufficient return on its capital.
- A risk premium for compensating the bank for the level of default risk involved in the request for a loan.