Why Shopping Lenders Can Be a Bad Idea

The Pitfalls of Over-Shopping for Lenders

When it comes to refinancing or securing a new loan, the common wisdom is to shop around. However, there’s a fine line between being thorough and over-shopping lenders. While it’s essential to get a good deal, excessive comparison can lead to adverse outcomes. Here’s why:

1. Credit Score Impact - Hard Inquiries

Each time a lender checks your credit report to offer a loan estimate, a hard inquiry is recorded. While shopping for the best rate within a short period (typically 14-45 days) is generally considered as a single inquiry that doesn’t impact your score, surpassing this window can accumulate multiple hard inquiries. This can negatively affect your credit score. Typically the impact is low but any change in credit can potentially affect your pricing.

2. Analysis Paralysis - Decision Overload

Confronted with too many options, borrowers can experience analysis paralysis — a state where the decision-making process is stalled due to the overwhelming number of choices. This can delay the locking in of a favorable rate, possibly leading to higher costs if market rates increase. This can also lead to delaying giving documents to the lender which can cause significant problems with underwriting.

3. The Cost of Time - Efficiency Loss

The more lenders you consider, the more time you spend gathering information, filling out applications, and communicating with potential lenders. This not only delays your loan process but can also divert time from other important financial or personal matters.

4. Relationship Benefits - Loyalty Might Pay Off

Some financial institutions offer better rates or terms to existing customers. Over-shopping and constantly switching lenders might make you miss out on these loyalty benefits, including lower fees or more favorable loan conditions.

Realize that loan officers are people too. Getting favorable terms might be difficult if you’re telling them that you’re shopping.

5. Market Volatility - Rates Can Change

Interest rates are subject to market fluctuations. Spending too much time shopping around can lead to missed opportunities. By the time you decide to proceed, the initially quoted rates might no longer be available.

6. Stress and Pressure - Emotional Toll

The process of applying for a loan is stressful enough. Adding the pressure of contacting numerous lenders, managing communications, and comparing complex loan offers can increase stress levels, potentially leading to rushed or poor decision-making.

Conclusion

While it’s crucial to not settle for the first offer and to ensure you are getting a competitive rate, there is a cost to over-shopping lenders. It’s about finding the right balance—doing due diligence without overextending and potentially facing the adverse effects mentioned above. Prioritize what’s important to you in a lender, whether it’s the rate, customer service, or loan terms, and focus your comparison within a reasonable scope. This approach will help you make a well-informed decision without the downsides of excessive lender shopping.