What You Need to Know About Rate Shopping

Also known as: comparing different rates from lenders when you're buying a car or house.

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We shop around for the best prices on cars, mattresses and books, so why shouldn't we do the same for mortgages and vehicle loans? As with any market, the one for cold, hard cash is busy and competitive.

Enter rate shopping, which is the act of discovering and evaluating the different rates offered by lenders for a particular home or auto loan. Here’s a guide to what you need to know about this potentially very beneficial activity.

How to Shop for the Best Interest Rates

Rate shopping almost always applies solely to mortgages and vehicle loans. Both categories deal with loans for big-ticket items, in which even a few tenths of a percentage point can make a serious difference in what the borrower ends up paying in interest.

For rate shopping, a good first step is to get a sense of the going rates for the kind of loan you're looking to secure. You'll then have a feel for how low some lenders are willing to go, particularly if you have a high credit score and are therefore perceived as a relatively safe borrower.

You can then get directly in touch with potential creditors. It doesn't hurt to let them know about some of the lower-cost loans you've found. Again, providers are well aware you can go elsewhere for the product, so few will dismiss a modest number out of hand. After this, go ahead and get a bunch of quotes from the most promising potential lenders.

One big caveat here—fees. Be aware that banks and other lenders often levy fees for loans. This is particularly true for mortgages, which can have a virtual grocery list of creditor fees that collectively reach well into the thousands of dollars. In your evaluation of the best offers, be sure to add in all potential fees.

Don't be shy in negotiating with potential providers about either the offered interest rate, the fees, or even both. Just the fact that they're talking to you indicates they’re interested in having you as a customer.

Will Rate Shopping Hurt My Credit Score?

In short: No, as long as you follow a few guidelines. Although a typical loan application will generate a "hard" inquiry—i.e., a detailed look at your credit—the credit bureaus realize that savvy consumers actively engage in rate shopping.

So, they assume that a cluster of quote-fishing applications in a short period of time is for this purpose. The period varies among the three credit bureaus and also depends on the type of loan being considered. It's hard to generalize, then, about just how short the said period is. It tends to range from two weeks to 45 days.

For credit analysis purposes, multiple inquiries within that period are considered to be only one inquiry by the credit bureaus. Therefore, if you have even a half-decent credit score, there's no need to worry that it will be rocked by those numerous loan applications.

A single hard inquiry, by the way, typically knocks off only a few points (typically five) from a FICO® Score. That's fairly insignificant. Also, it usually only affects your score for one year, and is erased from your credit history after roughly two years.

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