If you’ve spent any amount of time watching television, it’s likely you’ve seen the various commercials that purport to have banks and lending companies “compete” to offer you the lowest feasible rate. In the same vein, you may have also stumbled across online banner advertisements, promising unbelievably low monthly payments for mortgages or refinances.
Regardless of whether they appear online or on television, these advertisements, placed by sly entities often dubbed ‘lead aggregators’, are nothing more than deceptive money-making schemes. Their modus operandi involves collecting your personal information and then selling it to those companies who are “competing”—this could involve hundreds of entities, reputable ones and fly-by-night operators alike.
Before I delve into the specifics of how these companies can disadvantage you, let me clarify that at first glance, the premise seems perfectly legitimate. After all, who wouldn’t desire banks vying for their business? Doesn’t that imply that you can choose lenders at will, ultimately landing the lowest rate?
The reality, however, is far from this. In fact, becoming a lead for banks to compete over can be incredibly harmful and can easily lead to a higher rate (or no loan at all). That’s something you probably weren’t aware of.
Did you notice that I just referred to you as a lead? That’s because once you fill out one of their forms or dial their phone number, you transform into a fresh sales lead, ready for the taking.
HERE’S HOW THESE COMPANIES OPERATE:
You might be enticed by a banner ad, a TV commercial, or even a seemingly harmless van advertising free candy, coaxing you to fill out a simple form or call a number. You might think, “What’s the harm? I’m just seeking information.” However, what you might not realize is that as soon as you submit the form or end the phone call, you’re seen as a ‘hot’ prospect—a fresh sales lead.
When they say lenders are competing for your business, what they really mean is that mortgage brokers are bidding against each other for your information.
Essentially, the more enticing your responses, the more mortgage brokers are prepared to pay for your lead.
But why would they pay for your lead? Aren’t you still in control? Can’t you just select the lender with the lowest rate?
If only it were that straightforward. In sales, there’s a simple golden rule: the first one to reach a lead is typically the one who closes the deal. Consequently, some lenders purchase your information (and call) immediately. Following this, there’s the ‘silver rule’ of sales: always call every lead, regardless of how old it is. This means that other lenders might wait a few days, weeks, or even months to get your information at a cheaper rate and contact you then.
The convergence of the golden and silver rules equates to one fact: you will receive calls frequently, and for a long period.
Now, pause for a moment and consider this logically: If it were simply a matter of choosing a rate, there would be no need for this whole charade. Banks could merely advertise their rates on a website, and you could select the lowest. Why engage in a game involving forms and calls from different lenders? Why not just display all the rates, and let you choose without giving your name?
Well, because their ultimate goal is to sell to you—it’s a business, after all.
.. OH, AND YOUR CREDIT SCORE TAKES A HIT, TOO
So, lenders pay for your lead. Typically, there will be 3-4 lenders who are willing to shell out considerable sums (sometimes hundreds of dollars) for the freshest lead.
They then contact you immediately. If you complete the application at 3:00 am, there’s a high likelihood that your phone will ring at 3:10 am, and on the other end is a salesperson, wide awake, who received an instant notification about your application.
The freshness of leads is THAT crucial. And indeed, the cost of the lead will be passed onto you.
What happens a day later, when your lead isn’t quite as fresh? Well, there are still lenders interested. They pay slightly less than the initial lenders and contact you a day or two later. Then they make their pitch.
A week later, you have Frank from Frank’s Cut-Rate Mortgages and Bait Farm who likes the value of week-old leads because they’re considerably cheaper. So, Frank purchases your lead a week later and contacts you too (irrespective of whether you’ve already secured a loan or not). Enjoy your conversation (Frank is quite a character).
In essence, you’ll be bombarded with calls and emails for months. The first lenders paid top dollar for your lead, while months later, when Frank’s less successful cousin finally contacts you, your lead might have cost just six cents. Feeling a bit exploited yet?
However, the onslaught of calls and emails isn’t the worst part. All of these lenders, from the initial ones to Frank and the rest, well, they pulled your credit. Meaning, you now have an influx of inquiries on your credit report, which, if you didn’t already know, diminishes your credit score.
In fact, as per an article on MYFICO.COM, whenever you apply for a mortgage, auto loan, or other forms of credit, you authorize the lender to request a copy of your credit report. These types of inquiries, spurred by your own actions, appear on your credit report and factor into your FICO score.
The cruel irony here is that a LOWER CREDIT SCORE = A HIGHER RATE.
If you didn’t accept the initial offer or two, the multitude of inquiries may have lowered your score to the point that you can’t secure a low rate. In fact, your score may have dropped so much that you’re no longer eligible for the loan you initially wanted. And the first salespeople who contact you will certainly tell you this—it forms part of their closing strategy. They’ll say, “Take my rate, because your score will be going down from more inquiries.” And by then, you’re left with very little choice.
So, no, having banks compete is not advantageous for you.
Now, I’m not advising you to just walk into your local bank and accept whatever they offer. That’s not the point at all. If you’re seeking a car loan, a mortgage, or any other form of financing, there are plenty of ways to conduct your own research without jeopardizing your privacy and/or credit score. I recommend making a cup of coffee and spending an evening or two online, researching rates and lenders.
Doing this will save you additional costs, protect your credit score, and shield you from an avalanche of sales pitches from people who would sell you a bucket of bait along with your mortgage.