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rate shopping: how to get a loan with low interest

Updated: Sep 12

Are you looking to take out a loan or mortgage soon?

In order to get the best possible deal, it may be time for some rate shopping to find an offer that fits your needs.


What is loan rate shopping?

Credit Karma says, "Rate shopping — the process of gathering quotes from multiple lenders and comparing offers — can help you spot better loan terms and potentially save money on interest."


It's like clothes shopping, without the fun. 😂

But it's totally worth it.


For example: Let's say you are taking out a five-year loan for a $45,000 vehicle.

If you get a loan at 4.5% APR, you'll pay ~$5,300 in interest.

If you get a loan at 6% APR, you'll pay ~$7,200 in interest.

If you get a loan at 7.5% APR, you'll pay ~$9,100 in interest.


A little rate shopping could save you thousands of dollars. Cha-ching!

Rate shopping is excellent, but you must know how to do it correctly.


A Few Foundational Items

Did you know your credit score, debt, and income determine your loan terms and conditions?


Review your credit report

Knowing what's on your credit report before rate shopping is like laying the foundation for a new home. You'll want to see what's there before lenders start making inquiries. If there are any errors/discrepancies, you'll want time to clean them up. Also, if you want to see how many inquiries (credit checks) are attached to your name, your credit report has a comprehensive list.

You can get three free credit reports a year—one from each credit reporting agency: Equifax, Experian & TransUnion. The only federally backed place to get your credit report is annualcreditreport.com.

Quick caveat: Since the COVID era, we have had the option to get a free credit report once a week. I don't know when this will return to the original cadence, but feel free to take advantage of it.

picture of a faux paper credit report

Do your research

Know which companies you'd like to potentially lend with and have a list ready. You don't want your time window (more on this below) to eclipse while you're still researching.


Terminology

Credit check = Credit pull = Credit inquiry

All three of these terms are used interchangeably below.


Credit score impact

Most often, when a lender runs your credit, it's a hard pull. The Ascent says, "The degree to which a hard check dings your credit score depends on your credit history. According to FICO, a hard inquiry reduces the average consumer's credit score by less than five points."

Hard credit check

As mentioned, a hard pull triggers a slight negative impact on your credit score. Your score typically recovers from this after a few months. However, the more hard pulls you have, the more significant the impact will be.


Soft credit check

A soft pull does not impact your credit score. A soft pull can happen for several reasons: a financial institution may be gathering information unrelated to a credit application, or you are checking your own credit report.


You can always ask a lender if they will be using a hard or soft inquiry, but a lot of the process happens online these days; it may not be feasible to get a representative on the phone who knows what type of pull happens during their application process.


That's where the window of time comes into play.


Window of Time

As Experian puts it, "To accommodate rate shopping on installment loans such as mortgages, auto loans and student loans, FICO and VantageScore treat hard inquiries related to loan applications submitted within a narrow time as a single event."


Meaning... you can check with as many lenders as you want to find out what they offer, as long as you do it within a specific timeframe.

When dealing with various lenders, you never know which credit score model they'll use. For more information on that, you'll want to check out this post-- FICO v. VantageScore.


FICO

The current window of time on their newer models is 45 days. However, they still have older models in use that are only 14 days.

VantageScore

The current window of time with VantageScore is a rolling two-week period.

To be safe, it's best to do all your window shopping within 14 days.

two women window shopping and holding shopping bags

A quick note about credit cards

You can rate shop for credit cards by going through their prequalification process. Prequalifications are mostly done with a soft pull. If you go beyond that stage, a hard pull will be used.

NerdWallet says, "People who apply for multiple credit cards in a short time frame are considered high risk, and these inquiries all count. We recommend spacing credit card applications out by at least six months if you can."


The Bottom Line

Rate shopping is a great way to save money but it comes with guardrails. Stick within the 14-day window, and you should be good to go! And don't forget that you will see a slight decrease in your credit score-- no need to be alarmed; that's part of the process, and it will recover pretty quickly.


Here's to you,

Melissa Mittelstaedt

Money Coach (AFC® Candidate)

www.melissamitt.com

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