American drivers will haggle over the price of a car, which could make it all the more confusing that they aren’t always looking for the best rates on loans.
That’s according to a new study done this month by researchers at MIT’s Sloan School of Management and Brigham Young University’s Marriott School of Business, who analyzed more than 4 million auto loans from 326 institutions. different financial systems in the United States.
They analyzed consumer decisions by comparing borrowers who fit similar profiles, in terms of credit score and geographic location, and looking at the rates found by each borrower. They found that the majority of consumers they analyzed were not looking for loans. And about 80% of all borrowers in the sample for whom there is a comparable borrower did not take out a loan with the lowest available interest rate, the researchers said.
Borrowers who accepted higher interest rates ended up buying lower value cars, the researchers found. They offset their higher interest rate on the loan by purchasing a cheaper car; 1 in 4 people who got an adjusted higher rate by buying a car one year older. Consumers who accepted higher interest rates spent $ 715 less on a car purchase than those who received lower rates.
What did previous studies find?
They showed similar results. A 2016 survey by Bain & Co. found that more than half of consumers don’t compare offers when getting a loan, including personal loans. Consumers should check their credit score and use a loan calculator to find the estimated cost of a loan based on that.
Not shopping can be costly for consumers. The average term of auto loans hit a record high in June. It is now 69.3 months, 6.8% longer than the average loan term of five years ago, according to auto industry statistics website Edmunds.com. “People live near the edge,” said Christopher Palmer, assistant professor of finance at MIT Sloan and author of the study.
Why aren’t borrowers looking for the best loans?
Many consumers believe that if they go to multiple banks or credit unions and apply for a loan, they will be offered more or less the same rate, Palmer said. This, he says, is wrong. They also mistakenly believe that their own bank or credit union checking account will always give them the best rate, he said.
Consumers also fear that they will hurt their credit score too much by seeking loans, as potential creditors will “seriously investigate” or “pull hard” on their credit report. But FICO scores, a commonly used score named for the Fair Isaac Corporation, are not anchored for consumers who shop, a company spokesperson said.
Multiple auto loan applications within a 45-day window will only be counted as one credit check or search, he said.
How to check the rate to pay?
The Bankrate.com personal finance site offers an auto loan calculator that consumers can use to calculate how much they can afford to borrow. Nerdwallet and Credit Karma allow consumers to find rates and lenders by entering their credit rating and the cost of the vehicle.
Conclusion: Always know your credit score. After all, most people work hard to keep them high. Buying lower rates could help consumers save hundreds of dollars over the life of their loan. More than 85% of car purchases are funded and there are more than 0.8 car loans outstanding per U.S. household, according to MIT researchers. Consumers now take on average loans of $ 30,945.