"What's your rate?" and why it's a stupid question
It's the first question that starts almost every professional conversation I have ever had. This article will tell you why that's a costly question to ask.
First, bankers hear this every day. So, they have a lot of experience in fielding that question - either smoothly like a politician trying to schmooze you or with a smoke and mirrors “rate" that has no bearing on what you will actually pay (see other articles from this author about these interest tricks and games).
I'm not trying to offend anyone who asks that question rather to help you understand what questions to ask that will be much useful for you.
Some other stupid questions
- Can I pay this off early?
- What down payment do you require?
Deep down, all these questions are asking one thing - “How can I pay the least amount of money?" Or, how can I wring out some efficiency when I borrow this money? After all, paying wasted interest is inefficient.
Now getting to the heart of this question is hard for a couple of reasons. First, you don't do this every day and you're going up against someone who is a daily professional. They know what you don't know and make money off it. That's why “free" checking accounts have huge fees attached to them after you sign up for them.
Second, borrowing money is complex. There are 7 factors that determine how much interest you pay. It's multi-dimensional and hard to measure without experience. People like simple, one-dimensional things so they ask one question such as “what's your rate?" and then decide on just that one factor. This is a huge mistake and my mission in life is to help fire fighters (who do so much while asking for so little) not waste one red cent in this situation.
Here's the question to ask to get at the heart of the matter.
"What is your process to help me understand all 7 interest factors and how to use them to lower my overall borrowing costs?"
That's a question that a banker does not hear every day. No glossy answers to that question. The banker will be forced to acknowledge they know and will help you understand each of the 7 factors that determine how much total interest you pay. When you ask this question, you are actively getting to the heart of your issue - prevent yourself from paying the interest you don't need.
Why bankers want you to focus on the rate question and that's all.
Bankers only want you to think about and measure the “rate". By doing that, you're missing the other 6 factors that can cost you a lot more money.
Also, “rate" is very subjective. There are almost a dozen ways to calculate a “rate". I had to get a college degree in finance to learn all the ways that “rates" can be measured and the problems and benefits with each one. So, what you pay can vary wildly even though it's the same “rate".
So, when you don't have the experience to ask more than the one-dimension “rate" question, get help or ask the question I just offered and listen carefully to the answer. The answer should be easy to understand or keep going to find the better banker for you.
A good banker will walk you through all 7 factors based on your exact situation. They'll ask about your budget timing, when your funds are available, what you future plans are, and what your savings are planned for. They'll discuss fees and terms and possible things that may happen during the next 5, 10 or 15 years that this loan will be outstanding. They'll offer a plan that just “fits" for you. It'll seem right and it should be easily understood by you.
Borrowing money is much more complex than a single question. I can't help except to help you become better at borrowing money. You won't get your goal - not overpaying interest - if you only ask one question. There are 6 other factors that also influence how much interest you will pay. Get help by asking the question and from the banker who is willing to help with all 7 factors. You'll save thousands of dollars you didn't know you had wasted before.
Stay safe! John Hill, Apparatus Budgeting Consultant
Toll-free (877) 368-4946
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