Not All Lenders Charge the Same

What this means

There is no single price for borrowing money. Two people can borrow the same amount, on the same day, in the same town, and pay wildly different amounts for it. Three things explain most of that difference: who the lender is, what kind of credit it is, and what is happening in the economy.

Start with who lends. BanksBusinesses that hold deposits and make loans, owned by shareholders and operated to earn a profit. take deposits and lend that money out. Credit unionsNot-for-profit financial cooperatives owned by their members, who are also the depositors and borrowers. do similar work but are owned by their members rather than by outside investors, and any surplus goes back to members instead of to shareholders. Beyond those, there are online lenders that operate without branches, finance companies attached to car manufacturers, retail stores that offer their own store cards, and companies that offer buy-now-pay-later plans at checkout. There are also alternative financial servicesBusinesses such as payday lenders, pawnshops, and check-cashing outlets that provide credit and cash services outside the traditional banking system., which are typically the fastest to get money from and among the most expensive.

Next, the type of credit matters as much as the lender. A mortgage, a car loan, a student loan, a personal loan, and a credit card are priced very differently even at the same institution. Loans backed by something the lender can take if you stop paying tend to cost less than loans backed by nothing but a promise.

Third, and least visible to borrowers, are market conditionsThe overall conditions in the economy that affect the supply of and demand for money, including central bank policy and inflation.. Lenders do not invent their rates in a vacuum. They have to obtain money themselves, and what it costs them to obtain it moves with the economy. When the Federal Reserve raises the rate banks charge each other for short-term borrowing, banks' own costs rise and consumer rates generally follow upward. When inflation is high, lenders want a higher rate because dollars repaid later will buy less than dollars lent today. When the economy looks shaky, lenders raise rates or tighten standards because more borrowers may fail to repay.

One more thing separates lenders that looks small and is not: feesCharges a lender adds beyond interest, such as origination fees, annual fees, late fees, and prepayment penalties.. An origination fee taken out of the loan up front, an annual fee on a credit card, a late fee, or a penalty for paying a loan off early all add to what you pay. A loan with a slightly lower interest rate and a large origination fee can easily cost more than a loan with a slightly higher rate and no fees. Rate alone is an incomplete comparison every time.

Why it matters

Within a few years, some of you will be asked to sign something. It might be a first credit card offer that arrives during a first semester of college, a loan for a used car, or a payment plan for a phone. In each case, more than one lender would have been willing to make that loan, and their prices would not have matched.

The gap is not small. On a car loan, the difference between the cheapest and the most expensive offer a single borrower could get can run into hundreds or thousands of dollars over the life of the loan, for exactly the same car. That money is not decided by how hard you work or how much you earn. It is decided by whether you shopped. Comparing three lenders is not a sophisticated financial technique. It is a phone call, and it is the highest-value hour of work most young borrowers will ever do.

Try it

1. Build a class inventory of lenders. Split into groups and find real institutions in each category: national banks, local or regional banks, credit unions, online-only lenders, manufacturer finance arms, retail store cards, buy-now-pay-later companies, and alternative financial services such as payday lenders and pawnshops. Name actual businesses, not categories.
2. For each lender your group found, record what types of consumer credit it offers. Some offer everything; some do exactly one thing.
3. Pick one type of credit that the whole class will study together, such as a used car loan or a standard credit card. Every group researches the same product so results are comparable.
4. For your assigned lenders, find and record the currently advertised interest rate range and every fee you can locate. Look for origination fees, annual fees, late fees, and prepayment penalties. Rates change constantly, so record the date you looked and use the lender's own published page as your source.
5. Build one shared class table, sorted by rate. Then re-sort it by rate plus fees. Note every place the order changes, and discuss what that tells you about comparing on rate alone.
6. Investigate why rates differ within your table. Write one paragraph on the difference between a member-owned credit union and a shareholder-owned bank, and one paragraph on why a payday lender's cost is so much higher than a bank's.
7. Now go outside the borrower. Look up how a benchmark rate such as the federal funds rate has moved over the past few years, and find a news article from a period when it changed. Write a paragraph explaining what happened to consumer borrowing costs afterward and why.
8. Write a closing half-page: if a friend told you they were about to accept the first loan offer they received, what three specific things would you tell them to check first, and why does each one matter?

Check yourself