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Sub-Prime Teaches Us: Always Shop Around

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As if this sub-prime lending thing hasn’t gotten messy enough, it looks like a lot of folks who could’ve gotten a prime loan instead got a sub-prime loan instead. Signing a sub-prime loan is a lot more lucrative, for both the lender and the agent securing the deal, because the rates are usually higher. The reason why the rates are higher is because it’s a hedge against the riskier loans but when the borrowers aren’t actually riskier (just tricked into thinking they are), it’s like the best of both worlds… a prime borrower paying sub-prime prices. It’s like getting someone to pay full price at Macy’s when they have sales every other freaking weekend.

The true moral of the story is that you should always shop around for the best price. Let’s take some other industry, say auto insurance, and look at the sales practices there. The agent you speak to will always get you the deal that is good enough to induce a sale. If they give you too low of a price, they cut into their commissions. If they give you too high a price, they will risk losing the sale. What you do by getting multiple quotes is force these people into playing a reverse prisoner’s dilemma.

In addition to the fun of seeing multiple offers, you also may learn information by accident. For example, when I was buying my windows I was given a “one day offer” price that was big percentage points lower than the regular offer. I flatly told the guy that I was getting multiple quotes and whether that was truly a one day offer or more like a three day to one week offer (I knew it was more like an “offer that’s as long as I want it to be”). He had to have known that once I talked to another window company that I’d realize their regular offer was a rip and that it was only the one day offer that was competitive (read about my thoughts on salesman created urgency, which is a popular selling tactic), so he told me that it was good for a week. If you didn’t know that the one day offer was actually good for a week, you might have buckled and bought a deal that wasn’t really all that good.

That’s the sort of crap the mortgage lenders were pulling on people and only underscores the importance of shopping around. The buyer is responsible for the sale, not the seller (though they should have acted ethically), so as a buyer you have to do your homework. I don’t blame the lenders, they did their job, it was the borrowers that dropped the ball.

(As for the contention that lenders may have taken advantage of language barriers to pressure people to do things they didn’t understand, I understand that and sympathize but I still think that people are responsible for their own decisions and the decision making process isn’t different if you can only speak [insert non-English language here]).

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2 Responses to “Sub-Prime Teaches Us: Always Shop Around”

  1. plonkee says:

    You are right to say that the decision making process is the same regardless of language. The ability to access the information required to make a good decision is affected by language. In most developed countries, the educational level of an individual is related to (not not caused by) the language they speak – i.e. there are some high status and some low status languages.

    But yeah, shopping around is always near optimal – and done is better than perfect.

  2. Star Money Articles for the Week of June 4

    Here are interesting posts and news this week from the MoneyBlogNetwork and beyond: AllFinancialMatters thinks we may be saving more than we think. MightyBargainHunter got a great deal at a yard sale. Five Cent Nickel tells us that Honda is

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