When people think of shopping around for the best interest rate it is often in conjunction with getting a return on money in a savings account, annuity or certificate of deposits. While undoubtedly this is an important undertaking, looking for the best interest rate is often critical when one is looking for a loan. Too often we find that people looking to acquire an item- whether a car, consumer good or even credit cards look to what they are acquiring with greater focus than what the merchant is charging them for the loan. In this vein, many people will be surprised just how much their “buying power” is impacted by the getting a “better rate.”
Let’s take for example if you are in the market to buy a car. People looking for a car may shop on the many websites available online and find the best price for the car they are looking for. What they often don’t do, however, is consider what rate that car dealership will be charging for the loan to purchase that car if they do not pay for the car in full. Consequently, what they think is a “good deal” because the purchase price of the car is the lowest around may ultimately cost them more money when you factor in a higher interest rate. This same can be true for nearly any purchase one makes that is financed by the merchant.
To this end, we often recommend that you shop for a loan separately from the actual purchase. How can one do this? First, you should begin by applying for a loan with various lending outlets. Generally, credit unions, banks and even online outfits can prove you with rate quotes depending on the size of the loan you are looking and your credit score. Going back to our example of purchasing a car, there is no rule that you need to get the loan from the car dealership. Instead, we recommend that you go car shopping independently and negotiate the best price for the car, and then couple that with the lender that is offering you the most favorable terms.
Often times, credible lenders will provide you a “prequalification” for a loan in a certain amount and knowing this amount will allow you to independently negotiate the cost of the item you wish to purchase. Once you have you come to the “best offer” for the retail item you are purchasing, you can then tell the seller of the rate you have from an outside institution and see if the seller can beat that rate.
It is important to keep in mind that lenders and sellers are not obligated to provide you with the best rate when they work with you. Keep in mind that they make money on the loans and the most profit is arrived at by charging you the highest interest rate. This is true whether you are getting a mortgage, buying a car, or selling structured settlement payments. In this vein it is critical that you look at the full cost of the financial transaction. For example, if one group is selling you an automobile for $12,000.00 and charging you 7% interest per year and the other group is selling the same car for $12,800.00 but charging you 6.25% interest you may be better off agreeing to the higher purchase price with the second seller.
A simple way to determine which collective arrangement provides the best terms is to look at the monthly payments you would be making and then total them up over the course of the loan. Assuming the period of the loan is the same, the lower monthly payment is obviously better. If the terms of the loan, however, are for different periods you simply need to figure out the total amount you will be paying under each loan and see which one is lower.
Kathy Manson is a Finance Coach and Blogger. Currently, she is working on cash for structured settlement at http://www.catalinastructuredfunding.com. She is very proactive and aware about each and every update of financial changes in the industry. On Twitter @structured fund.