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Now there's even more reason to shop for the best credit terms

By Thomas WattersonBusiness correspondent of The Christian Science Monitor / December 9, 1981



With interest rates as high as they've been lately, the idea of shopping for credit seems pretty silly to some people. Even with the best loan terms they can find, they still can't afford that new house, car, or home improvement project.

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But with sky-high interest rates being blown away like clouds before a slight breeze, now is a good time to compare loan rates. A few percentage points of interest can save a substantial amount of money.

''There does tend to be some variation among lenders as overall rates move down,'' said Leonard O'Connor, vice-president in charge of the consumer finance department at the First National Bank of Boston.

Those rates will not be coming down as fast as the prime rate, however. They never do, Mr. O'Connor notes. The rates ''tend to lag on the downside as well as the upside,'' he explains.

For consumers who can wait for rates to slide down further before applying for that loan, the question becomes: What is the lowest point rates will hit?

''That's a real tough call,'' O'Connor says. He then offers one guideline: ''Historically, every time rates come down, they don't go down to their previous base. And when they go up, they push past their previous peaks.''

In this economic climate, O'Connor and others agree, people can sometimes find a little more competition among lenders. So knowing how to compare rates, loan costs, and payment schedules can save several hundred - maybe even a few thousand - dollars.

On a car loan, for instance, a couple of percentage points might save enough cool cash over the life of the loan to pay for air conditioning. Those points can be saved either by waiting for rates to drop that much or by careful credit shopping. Credit shopping starts with a few questions.

* How much does the loan cost?

A decade or so ago, Congress passed a law known as the Truth in Lending Act. This law requires lenders to tell you both the ''finance charge'' and the ''annual percentage rate.'' The lender is required to clearly show both of these charges on a disclosure sheet. You can ask for this before you begin applying for the loan. Two factors affecting cost are finance charges and the length of the loan.

* What is the ''finance charge?''

This is the total dollar amount you are charged for the credit. Let's say you take out a $6,000 loan for a car, financed at 16 percent for 48 months. Your payments would be $170 a month. If you did not pay off any of the loan early, your total payments would be $8,160, giving you a finance charge of $2,160. The finance charge should also include premiums for credit life, accident, or health insurance, if the lender requires any of these on the loan.

* What is the ''annual percentage rate?''

This rate, sometimes stated as APR, is the finance charge expressed as a percentage. The 16 percent used in the car loan example is the APR in this case. This is the one that can save you money if you wait until rates drop a bit.

* What is the length of the loan?

If you can manage it, a shorter term on the loan will result in a lower overall cost, even though the monthly payments will be higher. For that $6,000, 16 percent car loan, for instance, a three-year payment schedule will mean monthly payments of $211, but an overall cost of $7,596, a saving of $564.

Another way to cut the cost of the loan is to scrape up as big a down payment as you can. If it had been a $5,000 car loan instead of $6,000, the 48 monthly payments would drop from $170 to $148, saving you $1,056 and giving you payments that are easier to handle at bill-paying time.

While the example here has concentrated on auto loans, the same rules apply to personal loans as well as loans for such things as home improvements, trailers, boats, and appliances. For home mortgages, however, the borrower often needs to consider things like property taxes, if they are paid by the bank.

Of course, the new and confusing world of variable, adjustable, and balloon mortgages makes any explanation of conventional, fixed mortgages - which are somewhat similar to auto and other loans - rather obsolete. But that's another column. Reinvesting proceeds from stock sale

When a company buys back its stock at a profit - and no broker's commission - what do I do with the money other than six-month CDs? - J. M.

When a company buys back its stock, the cash proceeds offer a new investment opportunity. If stocks proved profitable, as the sale at a profit seems to indicate, then reinvesting the cash in stocks could be the best answer. To make this reinvesting decision, some factors not mentioned in your letter have to be considered: age, other assets and net worth, income, and number and/or extent of dependents.

Also, investment of the cash proceeds in fixed-income securities might be best for now. This is because interest rates - though falling - are still high. Thus, income from money market mutual funds, certificates of deposit (CDs), and interest-sensitive stocks and bonds is likely to keep ahead of inflation for at least a few months.