How to Measure the Performance of a Loan Product

We are currently experiencing a surge in fintech, with many fresh startups providing lending and credit solutions. With numerous companies competing for new borrowers, the struggle to stand out has become more intense. Therefore, it is crucial for founders to strategize and be analytical in their loan approval and offer process.

This write-up highlights eight vital metrics that founders should focus on to ensure an efficient pipeline, robust underwriting, and a seamless experience for their customers and will walk you through a scenario that explores each of these metrics in action. 

8 Key Metrics for Loan Performance

When launching a loan product, there are eight key metrics that will clue you into how your product is performing:

1. Pull Through Rate
2. Decision to Close Time Cycle
3. Abandonment Rate
4. Average Origination Value
5. Application Approval Rate
6. Net Charge-Off Rate
7. Customer Acquisition Cost
8. Average Number of Conditions Per Loan

Below, we’ll dig into each of these metrics in more detail. 

1. Pull Through Rate

The Pull Through Rate is a crucial key performance indicator (KPI) that gauges the effectiveness of your pipeline. This metric is determined by dividing the total number of funded loans by the total number of applications received within a specific timeframe:

(# of Funded Loans) / (# of Applications Submitted in Same Period)

There are several crucial observations that can be extracted from this metric, including:

• The efficiency of the workflow
• The caliber of submitted applications
• The level of customer service provided
• The competitiveness of interest rates
• The compatibility of a prospective customer’s profile

The Pull Through Rate is a significant benchmark as it offers valuable insights into the quality of your pipeline and the borrowers it attracts.

2. “Decision to Close Time” Cycle

The cycle of “Decision to Close Time” refers to the duration in days between the underwriting decision and the funding and closure of a loan:

(Sum of Days from Application to Funding for All Loans) / (# of Loans Funded in Same Period)

Generally, the average loan cycle spans a week, although it may vary. Despite being partially automated, the speed at which a loan closes primarily relies on customer interactions. If the cycle times exceed the expected duration, it’s possible that redundant touchpoints and a lack of clear communication between loan support personnel, loan officers, and borrowers are contributing factors.

Measuring this KPI is crucial because it sheds light on any issues that may cause the loan cycle to be prolonged, such as inefficient touchpoints and unclear communication channels. By identifying these areas, loan support staff can streamline the loan process, making it more efficient and enhancing customer satisfaction.

3. Abandonment Rate

The Abandonment Rate refers to the proportion of loan applications that borrowers abandon after receiving lender approval:

(# of Approved Applications Not Funded) / (# of Approved Applications in Same Period)

The Abandonment Rate is a critical KPI as it can fluctuate dramatically due to external factors. For instance, a report from August 2021 indicated that during some months of the COVID-19 pandemic, certain companies had an Abandonment Rate as high as 34%.

Although the causes of high Abandonment Rate can be unpredictable, several factors typically drive it, such as the lack of transparency between the lender and the prospective borrower during the approval process, incomplete form submissions, and inefficiencies within the application review and approval processes.

Monitoring your Abandonment Rate is crucial as it can reveal valuable insights into customer behavior, including the reasons behind it and the impact of significant external factors.

4. Average Origination Value

The Average Origination Value is a KPI that gauges the total revenue your company earns for a specific loan over a certain period.

To determine this metric, several data points are considered, such as:

• Origination fees
• Underwriting fees
• Other fees that are added to revenue*

Measuring your Average Origination Value is essential because if it’s low, it may indicate that either the average value of the loans originated is low, or the origination fees are below the industry’s acceptable standards.

* These fees will vary from lender to lender and will depend on the various fees that generate revenue at your company.

5. Application Approval Rate

Application Approval Rate is the number of approved loan applications in a given period divided by the total number of loan applications, regardless of approval, during the same period:

(# of Approved Applications) / (# of Submitted Applications)

The Application Approval Rate is calculated by dividing the number of loan applications approved during a given period by the total number of loan applications submitted during the same period, regardless of approval:

• Significant issue in document gathering and application review processes; or 
• Disconnect in your ideal customer profile, leading to increased applications from unqualified borrowers 

A low Application Approval Rate is a clear indication that your operation is concentrating on the wrong types of customers, leading to a waste of resources and time, which can cost your company dearly.

6. Net Charge-Off Rate

The Net Charge-Off rate is an annualized metric that measures the proportion of net charge-offs to average outstanding loans. Net Charge-Offs are calculated by deducting the recoveries of delinquent debt from the lender’s gross charge-offs:

(net charge-off / average outstanding loans) x 100 

The Net Charge-Off rate is a useful gauge of the average outstanding loans against the debt that a lender deems uncollectible. Typically, debt that is unlikely to be recovered is written off and classified as gross charge-offs. When calculating the Net Charge-Offs, any amount eventually recovered on the debt is deducted from the gross charge-offs.

7. Customer Acquisition Cost

Customer Acquisition Cost is a metric that evaluates the expenses incurred in converting a prospective lead into a customer. It refers to the total cost of sales and marketing that a company needs to obtain a new customer over a specific period:

(cost of sales + cost of marketing) / # of new customers acquired

The ideal Customer Acquisition Cost should be higher than one (>1). If the cost of acquiring a borrower is less than one, they are considered unprofitable since the cost of acquisition is greater than the profit they will generate for the lender.

Measuring this KPI helps lenders ascertain how much of their resources they can allocate profitably to a specific customer without incurring losses.

8. Average Number of Conditions Per Loan

The Average Number of Conditions Per Loan is a KPI utilized by lenders to improve their customer experience. During the underwriting process, the potential borrower’s application is evaluated against a set of criteria that must be met to obtain loan approval. Occasionally, the underwriter may discover something in the application that requires more information to make an informed decision. In such cases, the underwriter will issue a condition, requesting the additional information needed to process the application.

According to the International Monetary Fund, the average number of conditions per loan is 26.8. Additionally, the same study shows that the number of conditions on loan applications is increasing.

Each condition added to the loan process has a detrimental effect on a lender’s ability to provide a smooth and expedient customer experience. It’s essential to keep track of the number of conditions that the underwriting process may impose on potential borrowers. Too many conditions may deter potential borrowers. Conversely, you’ll need to have the appropriate conditions to support an underwriting process that attracts high-quality borrowers.

The 8 Metrics in Action

The eight metrics described above are key to assessing how your loan product is performing. That said, knowledge is only half the battle – seeing how these metrics work and what they mean in practice is, at least, as important, too. To illustrate these metrics in practice, here’s a scenario: 

A lender, let’s call it LoanZoom, specializing in personal loans has recently launched a new mobile application to streamline the loan application and approval process. The company wants to track various KPIs to ensure that the app is functioning efficiently and that borrowers have a positive experience:

• Pull Through Rate: In the first month of the app’s launch, the lender received a total of 1,000 loan applications through the app. Of those applications, 800 applicants met the necessary criteria and moved on to the next stage, resulting in a Pull Through Rate of 80%.
• Decision to Close Time Cycle: The lender’s average Decision to Close Time Cycle is ten days, with the decision-making process taking an average of five days, and the loan funding and closure process taking an average of five days.
• Abandonment Rate: Despite the app’s user-friendly interface, the Abandonment Rate for loan applications is 25%. After analyzing the data, the company discovers that most of the abandoned applications were incomplete, with many borrowers failing to submit all the necessary documentation.
• Average Origination Value: The Average Origination Value for the first month of the mobile application’s launch is $10,000, which indicates that the lender’s loans are higher than the industry standard.
• Application Approval Rate: The Application Approval Rate for the first month of the app’s launch is 60%, indicating that 60% of loan applications received were approved.
• Net Charge-Off Rate: The Net Charge-Off Rate for the lender’s personal loans is 1.5%, meaning that 1.5% of the loans issued by the lender in a given period became delinquent, resulting in a net loss for the lender.
• Customer Acquisition Cost: The Customer Acquisition Cost for the mobile application is $200 per customer, with the total sales and marketing costs for the first month of the app’s launch amounting to $20,000.
• Average Number of Conditions Per Loan: During the first month of the mobile application’s launch, the average number of conditions per loan was 20. This indicates that the underwriting process is not overly burdensome for borrowers, as they can easily provide the necessary information to meet the lender’s criteria.

With this example, it should be clear how and why each of these metrics helps to show what is and isn’t performing with a loan product.  

Final Thoughts

The fintech lending industry has never been more crowded, and the trend is set to continue. For founders to remain competitive, tracking the right metrics is essential. The eight metrics mentioned above are among the crucial KPIs that can be used to monitor and optimize your pipeline, underwriting, and customer experience. A rigorous focus on these metrics and a commitment to acting on their insights can help your company maintain a competitive advantage in a crowded market. By leveraging these metrics, you can make informed decisions, streamline your loan process, enhance your customer experience, and drive better outcomes for your business.

Frank Gogol

A seasoned SEO expert, Frank has a long history of working with and for startups. Starting in mid-2018, Frank served as the SEO Strategist for Stilt, a fintech startup that provided fair loans for immigrants in the US and other underserved markets. While with the company, he scaled site traffic from zero to more than 1.5 million unique visits per month, driving the bulk of the company’s lead generation until it was acquired by J.G. Wentworth in December 2022. As employee #5 at Stilt, Frank was witness to, and part of, the successful building and sale of a fintech company, uniquely positioning him to create content for founders about all things startups.

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