Fintech
Digital lending unit economics
Contribution per loan, break-even volume, and acquisition payback decide whether a digital lender scales into profit or into losses.
Definition
A digital lender earns interest and fees on each loan, pays expected credit losses, and spends money to service the loan. What remains is the contribution per loan, and it is what funds the platform.
Once contribution is known, break-even volume is fixed cost divided by contribution. Relaxing underwriting to hit that volume raises expected losses and moves the break-even point further away.
Intuition
In lending, growth is not free and it is not automatically good. Every extra loan carries both a contribution and a small chance of a large loss, and the two must be measured together.
When to use it
- Modelling a new lending product or a new market.
- Deciding how aggressively to spend on customer acquisition.
- Testing how break-even changes when loss rates rise.
When not to use it
- With a single loss estimate and no sensitivity test.
- For revolving credit, where contribution continues without a new loan.
Formula
Contribution per loan
Contribution = Revenue − Expected loss − Servicing cost
What each loan adds before fixed costs.
Formula
Break-even loan volume
Break-even loans = Fixed costs ÷ Contribution per loan
The volume needed to cover the platform each period.
Formula
Acquisition payback
Payback = Acquisition cost ÷ Contribution per loan
The number of loans needed to recover the cost of winning a customer.
Worked example
Break-even for a micro-lender
Each loan earns ৳1,800, expected loss is ৳500, and servicing costs ৳300. Fixed platform costs are ৳25,00,000 a month.
- 1
Contribution
1,800 − 500 − 300 = ৳1,000 per loan.
- 2
Break-even volume
25,00,000 ÷ 1,000 = 2,500 loans a month.
- 3
Payback
A ৳1,200 acquisition cost is recovered by the second loan.
The lender needs 2,500 loans a month to break even, and that number rises if the expected-loss estimate is wrong.
Common mistakes
- Using revenue per loan instead of contribution to set targets.
- Assuming repeat borrowing before it is observed.
- Treating a loss estimate from a stable period as fixed through a downturn.
How it connects
requires
Learn the source first; the target assumes it.
- Credit risk and expected loss: Contribution per loan depends on an estimate of expected loss.
is an advanced form of
The source extends the target once the basics are secure.
- Break-even analysis: Break-even volume applied to a lending product's unit economics.
relates to
Useful to study together, in either order.