Skip to main content

Free pricing tool

The lowest rate you can lend at and still break even

Most rate calculators price a loan for the borrower. This one prices it for you. Put in what your money costs, what it costs to write and service the loan, and what you expect to lose — and it returns the rate below which lending is a donation.

The loan you are pricing

Quote the rate as

Changes what the answer is called, not what it costs. The instalment is identical either way.

What this loan costs you

Your blended cost of capital a year — deposits, wholesale lines and equity together. If you lend your own money, use what it would earn elsewhere.

Over the whole life of the loan, not per year — probability of default multiplied by loss given default. A 4% annual charge-off rate on a three-year loan is closer to 12% here.

Credit checks, KYC, disbursement and the staff time to write one loan.

Anything that scales with the amount — commission, insurance, stamp duty.

Collection, reconciliation, statements and support, per instalment.

The spread you want to earn on the money employed. Leave at zero for break-even only.

Fee income and your current rate

Optional

Collected at drawdown, so it is banked before anything can go wrong.

Charged alongside the instalment, so it stops when the borrower stops paying.

Optional. Adds a verdict on whether your current pricing survives your own loss assumption.

Break-even rate

30.67%

33.75% to hit your margin

Below this, every loan you write loses money.

Your pricing does not hold

At the rate you charge today, this loan stops covering its costs before losses reach the level you expect.

Your rate
24%
Loss rate it survives
0.69%
Headroom over your assumption
-3.31 pts
Short of break-even by
+6.67 pts

Where the rate goes

Every point of the break-even rate is paying for one of three things.

Cost of funds
12%
Operating cost
10.52%
Expected credit loss
8.15%
Break-even yield
30.67%
Target margin
+3.09 pts
Yield with target margin
33.75%

Quoted on a reducing balance.

The loan itself

Instalment at break-even
ZAR 978.15
Instalments
12
Cost to originate
ZAR 400.00
Total scheduled
ZAR 11,737.84
Interest charged
ZAR 1,737.84
Expected to collect
ZAR 11,268.33
Effective annual rate
35.37%

An estimate for pricing discussions, not a credit policy. It assumes losses are spread evenly across collections, which is optimistic about timing — defaults cluster early, when the balance outstanding is highest — and conservative about recoveries, which it ignores. The target margin is a spread on assets, not a return on equity. Check your jurisdiction's interest rate cap before quoting anything.

If losses run higher than you expect

The same loan priced across a range of lifetime loss rates. Your own assumption is marked.

Break-even rate by lifetime loss rate
Lifetime lossBreak-even rateWith target marginInstalmentTotal scheduled
0%22.64%25.67%ZAR 939.03ZAR 11,268.33
2%26.59%29.65%ZAR 958.19ZAR 11,498.29
4% (yours)30.67%33.75%ZAR 978.15ZAR 11,737.84
6%34.87%37.98%ZAR 998.97ZAR 11,987.58
8%39.2%42.35%ZAR 1,020.68ZAR 12,248.18
10%43.68%46.86%ZAR 1,043.36ZAR 12,520.37
15%55.54%58.82%ZAR 1,104.74ZAR 13,256.86
20%68.5%71.88%ZAR 1,173.78ZAR 14,085.41
Opens in Excel, Sheets or any spreadsheet.

Why the answer is so much higher than your cost of funds

Lenders who price at "cost of funds plus a bit" are usually pricing below cost, and the gap is widest on exactly the small, short loans that feel cheapest to write.

  • 1

    Fixed costs do not care how big the loan is

    It costs about the same to underwrite, disburse and service a 2,000 loan as a 50,000 one. Spread over a smaller principal and a shorter term, that fixed cost turns into an enormous number of rate points. It is the single biggest reason small-ticket lending carries rates that look punitive and often are not.

  • 2

    You fund the costs too, not just the principal

    The money you spend originating a loan is money you had to raise. It has to earn your hurdle rate like everything else, which is why asking for a three-point margin moves the rate you must quote by more than three points.

  • 3

    Expected loss is charged on collections, not on principal

    If you expect to lose a share of what you are owed, the rate has to be grossed up so the loans that do pay cover the ones that do not. That gross-up compounds against every other cost in the stack, which is why the break-even rate climbs faster than the loss rate does.

  • 4

    The average balance is far below the amount lent

    On an amortising loan the borrower holds the full principal only on day one. Your funding cost is charged on what is actually outstanding, so it is a rate on roughly half the loan — which is exactly why a flat rate quoted on the original amount understates what the borrower pays and overstates what you earn.

The three things a rate has to pay for

Break-even pricing is a stack, not a formula. Each line is a real cost with its own way of going wrong.

CostThe question it answersWhere the number comes from
Cost of fundsWhat did the money you lent cost you to raise?Your blended annual cost of capital, charged on the balance actually outstanding rather than the amount disbursed.
Operating costWhat did it cost to write this loan and keep it running?The origination cost at drawdown, plus the servicing cost on every instalment, both discounted at your cost of funds.
Expected credit lossHow much of what you are owed will never arrive?Lifetime probability of default multiplied by loss given default, applied as a haircut on collections and grossed up so the paying loans carry the rest.

Add a target margin on top and you have a price. Leave any line out and you have a loss you will not see until the book has aged.

Effective Interest Rate (EIR/APR) Calculator

Break-even pricing, answered

What is a break-even interest rate?
The lowest rate at which a loan leaves you exactly as well off as not writing it. It covers what the money cost to raise, what the loan cost to originate and service, and what you expect to lose to default — and nothing more. Charge less and the loan destroys value however good it looks on the book.
Should I enter an annual loss rate or a lifetime one?
Lifetime, over the whole term of the loan. This is the single most common mistake with a tool like this. If your book charges off 4% a year and you are pricing a three-year loan, the figure this calculator wants is closer to 12%, not 4%. On a six-month loan it is closer to 2%. Getting this wrong understates the rate you need by more than any other input.
Why is the break-even rate so much higher than my cost of funds?
Because funding is usually the smallest of the three costs. On a small, short loan the fixed cost of originating and servicing it often rivals the cost of the money, and expected losses sit on top of both. On the default example here, funding is 12 points of a 30.7% break-even rate — the other 18.7 points are operations and credit losses.
Why does asking for a 3% margin raise the rate by more than 3%?
Because the margin has to be earned on everything you invested, not only on the principal. The cost of originating the loan was money you raised too, so it has to clear the same hurdle. The gap is small but it is real, and it grows with your cost to originate.
Does the flat or reducing choice change what I earn?
No. The instalment is identical either way — the choice only changes what the rate is called. A break-even loan quoted at 17.4% flat is the same loan as one quoted at 30.7% reducing, priced identically, earning identically. That gap is exactly why flat rates are quoted, and why several regulators require an effective rate alongside them.
How do I estimate my cost to originate a loan?
Take a period's total origination spend — credit bureau fees, KYC, disbursement charges, and the loaded cost of the staff time spent on applications — and divide by the number of loans written in that period. Most lenders doing this for the first time find the number is two to three times what they assumed.
What does the break-even loss rate tell me?
It runs the calculation backwards. Given the rate you actually charge, it is the highest lifetime loss rate that rate can absorb before the loan stops covering its costs. Compare it with what you expect to lose: if the gap is thin, your pricing has no room for a bad cohort, and if it is negative you are not covering costs even in a world with no defaults at all.
Does this account for the time value of early versus late defaults?
Only partly, and it is worth knowing which way the simplification cuts. Losses are applied evenly across scheduled collections, but in practice defaults cluster early in a loan's life when the outstanding balance is highest, which makes this optimistic. Against that, it gives you no credit for recoveries, which makes it conservative. For pricing decisions the two broadly offset; for provisioning, use your actual vintage curves.
Can I charge the rate this calculator returns?
Only if your jurisdiction allows it. Many markets cap consumer lending rates, and on small short-term loans the break-even rate can sit above the cap — which is a genuine finding, not a calculation error. It means the product cannot be written profitably at that size and term, and the answer is to change the loan, not the arithmetic.

Price every loan against its real cost

Lendbox holds your products, fees and charges in one place, so the rate on an application is priced from the same figures your reporting runs on — and you can see what a portfolio actually earns after cost of funds and write-offs rather than modelling it after the fact.

Start free trial

No credit card required.

Keep exploring