The Truth About Bank Loans
how do banks make money?Banks are in business because of their intermediary service. Banks pool money together from many customers by holding the funds secure and paying the depositors a low interest rate. Then they lend the money out to borrowers for a higher interest rate. More specifically, banks:
— Collect money by paying interest to the depositors.
— Lend money to borrowers at a higher interest than that paid to the depositors.
— Call the difference between the borrowing and deposit rates, "the spread."
In order to help the loan officer close the deal, he's given a margin to bargain with. This margin is left at his own discretion, as long as he respects certain minimums. Most people don't know this and never bargain. They're so content with getting the loan that they don't even bother trying.
Only when it comes time to renew the mortgage loan does the customer realize who's in a better bargaining situation. Here is an example of how you can bargain down your interest charge from the start.
Currently, the bank pays a depositor about 5% interest for a term deposit of 5 years. The bank then lends the money at 6.5% for the same 5 years. The bank's spread (gross profit) is 1.5%. Most people will accept this. But the loans officer can still lower the spread down to an acceptable minimum rate.
The minimum spread that is allowed by most officers is .75%. However, there are cases (for top clients) where the minimum spread can be as low as .3%. This means that you can lower the interest rate from 6.5% to 5.3% if you're a top client, or 5.75% if you're a regular client with good long-term potential. This might not seem like a lot but when you consider a borrowing term of 10 or 15 years, you can save thousands of dollars.
how do you bargain?So how do you bargain down your interest charge? The most important point is to let your loans officer know that you are shopping around for the lowest interest charge. Here are 3 points to keep in mind:
1. Let your banker know that you will not only finance your new home with the bank that gives you the lowest interest charge, but that you'll also move all your assets and deposits to that same bank. So not only is the loans officer losing a lending opportunity, but there is also a chance that he might lose a client (his deposits). For this reason, chances are that he'll most likely give you a lower interest charge.
2. If you have term deposits and assets in other institutions, tell the loans officer that you will consider transferring them to his bank (once they mature of course) if he can give you a better rate.
3. Remind your banker of your value as a client. Tell him that you're a good client. Yes, you're still young, but you have a good job, and you stand to potentially be a valuable future client. Don't underestimate your value.
you have the final sayToday, there is no reason to fear a banking loans officer. Banks have come to realize the importance of their clients, and will go out of their way to keep their business.
As long as you've kept a good credit rating, never filed for bankruptcy, kept your loan objectives reasonable, and as long as the banks continue to fight for your business, there is no reason why you shouldn't get your loan, or be able to shop and bargain for the lowest possible interest charge.