Why it’s important to shop around when taking out a loan by Paulo Nogueira
Anyone who has applied for a mortgage, car loan, personal loan for home improvements such as plumbing or painting and decorating or for a medical procedure like plastic surgery knows that the interest rates you can negotiate has a very big impact on the amount of money you will be paying back and also the monthly repayments.
I have been looking at the prospect of purchasing a home for the last few months, I have never been in a situation where I have taken out a significant amount of credit, and I have learned how important it is to negotiate your loans.
A lot of people are under the misconception that interest rates provided by banks, building societies, and mortgage brokerages are set in stone, when often you can negotiate a lower interest rate or more favourable terms. People seldom ask for a reduction in interest rates however, they may be quick to negotiate the price of souvenirs when on holiday. One negotiation may save you a few pounds however the other may save hundreds of thousands of pounds in the case of a mortgage or in the case of purchasing a smaller ticket item such as a car may result in saving tens of thousands over the course of 3-4 years.
For example If you are purchasing a £400,000 home and borrowing £320,000 the difference between a 3.8% APR loan means repaying £426,753 with a total amount of interest accrued at £105,373 over 25 year with a monthly repayment of £1,417. However a loan at 6.6% would make the total amount payable would be £651,574 with a total of £331,339 of total interest paid with a monthly repayment of £1,687. This shows how important it is to shop around and negotiate for a lower interest rate when possible as in the long term it can make a significant different to the amount you repay and the monthly repayments due to the power of compound interest.
An example of this was when I recently purchased a vehicle on a leasing agreement. After going through the entire process of test driving the vehicle, selecting all of the additional extras and exact model I wanted and negotiating on the price of the vehicle they presented me with a monthly repayment fee and total amount payable.
As I had done my research I knew that a significant contributing factor of that monthly fee was the interest rate which was offered to me by the credit company associated with that particular dealership. I knew that in the same way that the price of the vehicle can be negotiated so could the interest rates or terms of the loan and I was able to negotiate the fee from 11.5% to 10% which resulted in a saving of circa £20 per month plus a few optional extras. I felt quite proud of myself.
A few years later when getting ready to purchase or lease another vehicle I noticed when researching on MoneySupermarket.com that the interest rates I was given was significantly higher than what I could have received from my bank or a third party loan company. For example Sainsburys Bank are currently offering 2.8% interest rates based on your credit profile, it is a significant difference between both loans which could have resulted in savings of £3,000 over a 4 year period or hundreds of pounds on a yearly basis simply because of the credit option I chose when purchasing the product that I wanted.
MoneySupermarket.com and ComparetheMarket.com are great tools to use when selecting a credit option and more importantly when negotiating with other providers as an offer from them can be used as a bargaining chip to lower the interest rate they are offering you.