If you watch TV at all, you’ve probably seen the numerous commercials claiming to let banks and lending companies “compete” to give you the lowest possible rate. You may have also seen online banner ads proclaiming they can get you a mortgage (or refinance) with unreal low monthly payments.
Whether they are online or on TV, these ads, placed by sneaky companies often referred to as ‘lead aggregators’ are really nothing more than a shameful money-making scheme. Essentially, what they do is get your information, and then sell it to those companies who are “competing” (sometimes hundreds of them, good ones and fly-by-nights both.)
Now, before I go any further and tell you exactly how these companies harm you, let me state that on the surface, the premise seems perfectly legit. I mean, who wouldn’t want banks competing for their business? Doesn’t that mean you can pick and choose lenders, and get the lowest rate?
Well, not really. You see; the effects of becoming a lead for banks to compete over can be incredibly damaging, and can easily lead to a higher rate (or no loan at all). You probably didn’t know that.
Did you notice what I just called you? I called you a lead, because that’s what you become when you fill out one of those forms or call the phone number. You’re a fresh sales lead, and the sharks are circling.
HERE’S HOW THESE COMPANIES WORK:
You get lured on by a banner ad, TV commercial, or a perfectly normal looking van advertising free candy telling you to fill out a simple form or call a number. You may think what’s the harm? I’m just getting information. What you don’t know that as soon as you finish the form or phone call, you’re viewed as a ‘hot’ prospect. One who just gave out their contact information.
Lenders competing for your business really means: mortgage brokers compete against each other for the cost of your information.
In other words, the better your answers, the more mortgage brokers are willing to pay for your lead.
Now, why would they pay for your lead? Aren’t you still in the drivers seat? Aren’t you just going to pick the one with the lowest rate?
If it were only that easy see, the golden rule of sales is simple: the first one to get to a lead will usually close them. So, some lenders buy your information (and call) right away. And after that, the ‘silver rule’ of sales is call every lead, no matter how old. This means others will wait a few days (weeks, months) and get your information cheap, and call you then.
Taken together, the gold and silver rules mean one thing: you will get calls often, and for a long time.
Think about this logically for a second: If it were just as easy as picking a rate, there would be no need for any of this. Banks could just advertise their rate on a website, and you pick the lowest. Why the game with forms and calls from different lenders? Why not just show all the rates, and let you choose without you giving your name?
Because they want to sell you (makes sense, right?)
.. OH, AND YOUR CREDIT GETS TRASHED, TOO
Ok, so lenders pay for your lead. Usually, there will be 3-4 that are willing to pay a lot of money (sometimes hundreds) for the freshest lead.
Then they contact you often right away. If you fill out the application at 3:00am, there’s a good chance your phone will ring at 3:10am, and on the other end is a salesperson with a Blackberry (and insomnia), who got notified right away.
Fresh leads are THAT important. And yes, the cost of the lead will be passed onto you.
So what happens tomorrow, when your lead isn’t quite so fresh? Well, other lenders still want it. So they pay a little less than the first four, and get you (Mr. or Mrs. Lead) a day or two later. Then they call.
Then a week goes by. Frank, of Frank’s Cut-Rate Mortgages and Bait Farm, likes the value of week old leads and they’re really cheap. So Frank buys your lead a week later, and he’ll be contacting you, too (regardless of whether you already got a loan or not.) Have a pleasant conversation (Frank is interesting.)
Really – you will literally get bombarded with calls and e-mails. This may go on for months. The first four they paid top dollar for you. Months later, when Frank’s less successful cousin gets to you; you probably went for six cents (do you feel cheap and dirty yet?)
But that’s not the worst of it. All of these lenders – from the first four to Frank and the rest – well, they pulled your credit. Meaning you now have TONS of inquiries on your credit. Which, if you didn’t already know, lowers your credit score.
In fact, according to this article at MYFICO.COM, when you apply for a mortgage, auto loan or other credit, you authorize the lender to request a copy of your credit report. These types of inquiries, prompted by your own actions, appear on your credit report and are included in your FICO score.
The irony of this is the fact that a LOWER CREDIT SCORE = A HIGHER RATE.
If you didn’t jump at the first one or two that called, the mass of inquiries may have lowered your score enough so that you don’t get a low rate. In fact, you may lower your score enough that you can no longer get the loan you wanted in the first place. And trust me, the first salespeople who call will tell you this, and that’s part of how they close you. Take my rate, because your score will be going down from more inquiries. And by then, you have almost no choice.
No, banks competing is not a good thing.
Now, I’m not telling you to just go to your local bank and take whatever they give you. Not in the least. If you’re looking for a car loan, a mortgage, or any other type of financing, there are plenty of opportunities to do your own research without compromising your privacy and/or credit. I suggest you pour yourself a cup of coffee and spend an evening or two online, researching rates and lenders.
This will save you the added cost, protect your credit score, and spare yourself from the onslaught of sales pitches from guys who will sell you a bucket of bait along with your mortgage.