The Federal Reserve raised interest rates 69% since this time last year (2.35% to 5.5%), but what does this mean for the everyday consumer? It’s getting more expensive to borrow money. While the effect of an interest rate hike on a small loan may be negligible, it can add thousands of dollars to auto and student loans, and mortgage. Therefore, it’s never been more important to comparison shop when looking to borrow.
What Is the Purpose of Comparison Shopping?
Comparison shopping is the only way to familiarize yourself with the best available interest rates, know how much similar homes and cars are selling for and ensure you pay as little as possible on your big expenditure. Let’s look at the specific benefits and importance of comparison shopping for mortgages, auto and student loans.
Research shows that consumers can save an average of $600 annually on their mortgage by getting just a single additional quote. Those who receive four rate quotes could save more than $1,200 annually.
Comparison shopping for a mortgage is made easier by working with a mortgage broker, who can provide more specialization, savings and products than a retail lender. A good mortgage broker will bring valuable information to the table, such as which lenders loan money in certain areas, which ones offer a specific type of mortgage and which welcome or avoid certain types of homes such as co-ops, condos or multi-family homes.
Brokers work off of a wholesale price sheet, which offers consumers large credits for positive attributes of their loan. For example, someone with excellent credit and a larger-than-normal down payment could be eligible for thousands of dollars of savings using wholesale pricing. These incentives are often considered extra profit for a retail lender but when using a broker they can be passed on to the borrower to offset closing costs.
Mortgage brokers often negotiate better terms and pricing with lenders throughout the process because they bring multiple loans to the lender’s doorstep each month. The lender does not need to expend resources on the loan origination, so these savings can be passed on to the borrower.
Working with a mortgage broker also makes for a more seamless process. Brokers collect detailed credit profiles of their clients and match that profile to a list of multiple lenders. This gives the borrower the advantage of negotiating better terms throughout the mortgage process without starting over.
If someone applied to a retail lender and there was a problem with qualifying for a particular loan, the borrower may have to start the entire process over with a different lender. In the case of a broker, all the borrower’s information is maintained in a single credit file and can be easily transferred to a new lender to save time and money.
Buying a car and getting financing should always be thought of as two separate transactions.
Shopping for financing ahead of time ensures you are getting the best rate and terms. If you can arm yourself with a loan before you head to the lot, you will be in a much better negotiating position – and save yourself a lot of money in the long run. You can usually apply for a bank loan even if you don’t have a specific car picked out yet. The knowledge of available auto loan rates will significantly increase your negotiating leverage when it comes time to buy your new car.
Comparison shopping for auto financing also provides the opportunity to get preapproved by a lender. Knowing how much you’re preapproved for can help avoid spending more than you planned and from wasting time shopping for cars out of your budget. Some automakers’ finance companies also allow you to apply for preapproval – but you’ll be limited to buying one of the car maker’s vehicles. This isn’t the most effective strategy if you have your eye on vehicles from different brands.
Maybe most crucially when it comes to the car-buying market, starting your financing homework early will put you in a position to act fast. Vehicle inventory is low and the market is very competitive. When you find the car (and price) that’s right for you, you need to be prepared to strike.
When it comes to financing your higher education, you should always start by searching for scholarship and grant options. These are ideal funding options because it’s money you won’t have to pay back. Next, apply for federal loans, which have flat interest rates.
If more financing is needed after these steps are completed, you can begin looking around for private loans. The importance of comparison shopping can’t be stressed enough. It’s a simple step that will help you find the best loan for your situation. There are several factors to consider, including repayment schedule, length of the loan in number of years to repay and co-signer requirements.
It’s never too early to begin the process. With interest rates rising, applying for a private loan just a month or two earlier could save you thousands of dollars over the long haul.
And as always, AAA is here to help you save and answer all of your questions. Visit AAA.com to learn more about low-rate auto, home and student loans offerings.