When Banks Compete, Consumers Sometimes Lose
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When Banks Compete, Consumers Lose

Everyone has seen the ads on television and the Internet for services claiming to help get the best rate on a loan. Whether it is a car loan, mortgage loan or home equity line of credit, these services always advertise unbelievably low rates and unrealistically minimal monthly payments that they supposedly can help you get. It's important to know the truth about the companies behind this type of advertising.

Advertisers Are Not Lenders

The companies who place the type of ads that advertise the "competing lenders" strategy are lead aggregators. Their job is to collect and to sell consumer's personal information as quickly and for the highest price possible to as many lenders as possible. Any person who provides their data in response to one of these television or Internet ads instantly becomes a lead. Leads are sold to banks, brokers and unscrupulous lenders - basically anyone who will pay for the information can obtain it. So you see, the advertisers have nothing at all to do with what interest rate consumers are able to secure for their next loan.

Why Not Let Banks Compete?

On the surface, it seems like a great idea to have lenders compete, but let's dig deeper. In order to offer a loan, lenders must first pull a consumer's credit report. According to Fair Isaac, each time an application for credit is reviewed and a consumer's credit report is viewed by a potential creditor, it shaves a few points off of the credit score. Lenders are actually competing to be the first to buy the lead, the first to contact the consumer and the first to try to close the deal.

If the first lender who buys the lead contacts the consumer and offers a great deal, that is the best case scenario. However, depending on that to happen is a gamble, and in general, gambling with financial matters is not a good idea. With each lender that views the consumer's credit file, the credit score becomes lower and lower. That means that if the consumer did not get a great offer out of the gate, after their information is made available and cheaply purchased by a great number of lenders and their credit file is viewed many, many times, they may not even qualify for the loan they wanted in the first place and certainly not at a decent interest rate.

Having lenders compete means an almost definite destruction of good credit. In the best case scenario the consumer gets a great deal on a loan before their credit score bottoms out from long term and repeated credit inquiries. The worst case scenario can mean mortgage foreclosure and even filing bankruptcy. When the consumer's credit is demolished, refinancing their adjustable rate mortgage is not an option, bank loans are impossible to obtain and even existing credit card interest rates can soar causing financial devastation.

The Lead Aggregator Process

  • Consumer fills out a seemingly harmless application either online or on the phone in response to an advertisement, often just to get information.
  • The lead aggregator instantly begins selling the consumer's personal information to as many potential lenders as possible.
  • The consumer's credit report is pulled by many various lenders and he or she also begins to receive many calls and emails from lenders.
  • The consumer's credit score begins to decline with each credit inquiry. If a good deal is not obtained quickly, the chances of getting a competitive interest rate decline and eventually the credit score may become so low that no loan can be obtained.
  • Regardless of loan status, the consumer will still continue to receive many calls and emails from lenders and the credit file will continue to be viewed for many months, further deteriorating the consumer's credit score.

Protecting Credit Scores While Loan Shopping

Fair Isaac recommends doing all loan shopping within a short and focused period of time so that multiple views of the credit report may be consolidated when calculating the overall credit score. However, when an application is filled out for a lead aggregator, the lead continues to be sold for a long period of time. This means that the consumer's credit score will continue taking hits well into the future whether a loan has already been obtained or not.

Know the Facts about Your Finances

These tips for protecting your credit score are provided by Total Bankruptcy in order to improve financial literacy. If you are concerned about your financial outlook or are concerned about mortgage foreclosure, you may fill out a free case evaluation form and speak with a lawyer to determine if Chapter 13 bankruptcy could help save your home from foreclosure.

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