From The Conversation
The Federal Reserve makes headlines from New York to Hong Kong anytime it lifts its benchmark interest rate. Rightfully so, as any increase tends to drive up borrowing costs on everything from credit cards to auto loans and mortgages.
There’s a more important factor that determines how much you’ll pay when you borrow money to buy a car or home, and it’s entirely in your hands: it’s the lender you choose. That’s because how much a lender might charge you for a loan can vary dramatically from one to the next. That’s why it pays to shop around.
My research on auto loans shows that most consumers don’t do that, which can cost them hundreds or even thousands of dollars over the life of a loan or lead them to purchase a lower-quality car than initially planned. Fortunately, it’s pretty easy to avoid that.
Most of us shop until we drop for price bargains on clothes, computers or virtually anything else. With the internet, finding the best deal among products and companies is easier than ever.
A recent survey found that 92 percent of consumers are always looking for the best deal when they’re out shopping, while 80 percent said they’re willing to go out of their way to find a bargain.
So you’d think this logic would carry over to the bigger purchases in life. For most Americans, automobiles are the largest- or second-largest household asset they own. And most cars are purchased with the help of an auto loan.
And yet, while people often work hard to find the best possible deal on the price of a car, surprisingly most fail to shop around at all for interest rate bargains. Research shows this behavior isn’t limited to just auto loans – most people don’t shop around when taking out a mortgage or a personal loan.
And that’s even though financing costs for a typical loan can make up a significant proportion of the total cost of buying a car. For example, let’s assume you’re buying a US$25,000 car and financing the entire purchase. A $25,000 loan at a 4 percent rate would cost you $2,600 in interest over its life, adding more than 10 percent to the true price of the car.
Read the full post at The Conversation
Christopher Palmer is an Assistant Professor of Finance at the MIT Sloan School of Management where he teaches corporate finance.