Blog: RISK-BASED PRICING: Who Do They Really Benefit? (10/29/21)


Many mortgage companies, financial institutions and other lenders set loan rates based on two factors: term and borrower risk. The borrower risk part of this equation takes into account several pieces of information, including the borrower’s credit score, employment status, loan amount, and assets. The more risky the borrower appears, the higher the rate. If you’ve ever experienced the high end of this price, the sticker shock can be breathtaking. I remember my first car loan, where the lender explained that my rate could be around 4.5% or 5%. Instead, since I had very little credit history, the rate was well above 6%. It was pretty frustrating, and I felt like the financial institution was punishing me for not borrowing much up to this point. Perhaps you have had a similar experience.

At Farmers and Mechanics, we believe that this pricing strategy presents too much risk of harm to the borrower as it segregates borrowers by category and unduly overloads the less affluent and less experienced borrowers with credit. In the extreme, this can cause otherwise qualified borrowers to become unskilled, reducing vital homeownership opportunities.

Risk-based pricing can also make it very difficult for the borrower to find the best rate. Imagine a situation where a bank offers a special 2.5% APR rate for a 30-year mortgage, while its competitor offers a 3.25% APR for a 30-year mortgage. The First Bank, however, uses risk-based pricing.

Unless you qualify, you will not receive the 2.5% APR of the premium. Instead, your rate could go up to 3-3.5% or more.

To provide our borrowers with what we believe to be the fairest pricing, we at Farmers and Mechanics assign the same rate to all qualifying borrowers, regardless of who they may be. This allows you, as a borrower, to know immediately what your rate will be. We want you to understand from the start how much the loan will cost and whether it is right for your particular needs.

When you consider the lenders available in the market, we hope you assess the fairness with which they treat you. Make sure you understand all of the terms and how they plan to price your interest rate. If you have any questions, please give us a call.


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