Small loans still run in 18% range, so it's good to shop around

Interest rates are coming down, coming down . . . . . . except if your loan is small.

People borrowing fairly small amounts of money, say $2,000 to $5,000, still have to pay rather lofty rates, even though the banks and thrifts they're getting the money from have substantially lowered all their other loan rates, as well as the rates they pay for deposits.

While interest rates for first mortgages, second mortgages (or home equity loans), and most car loans have shadowed the steady decline of the widely watched prime rate -- now at 10 percent -- rates on small consumer loans and credit cards have barely budged. At some banks, in fact, they have increased.

The average first-mortgage rate, for instance, is down to just under 13 percent. Several auto companies, through their finance subsidiaries or other firms, are offering 8.8 percent rates on new-car loans. This has forced banks and thrifts to compete with lower auto rates of their own (although when the auto companies stop offering the special rates, expect the banks' rates to go back up quickly). At some banks, home equity loans vary from two or three points over prime; at others, they cost 13 or 14 percent.

Yet interest rates on small personal loans still average 17 to 18 percent and rates charged on major credit cards can go as high as 22 percent. Very few banks have shown any interest in lowering credit card rates, though there have been a few examples of reductions to 17 percent.

Why do banks continue to charge such high rates on small consumer loans? Part of the reason, says Wayne Bengston, project director for consumer lending at the United States League of Savings Institutions, is that small loans cost just about as much for a bank to process as big ones.

The trip that a $4,000 loan application takes through a bank's approval process is not much different from the trip taken by a $75,000 mortgage. While there are some added expenses associated with the mortgage, they are the reason the banks charge origination fees, or ``points,'' and extra fees for extra services, like appraisals.

Otherwise, Mr. Bengston says, the costs are about the same, and proportionately much higher on the $4,000 loan.

Another reason banks charge more seems to be that the public permits it. In the first quarter of 1985, consumer credit surged nearly 22 percent, to $477 billion, while business borrowing moved up only 12 percent.

Also, old habits die hard. When all interest rates were in the mid-teens and above, borrowers found it mentally easier to deal with monthly payments rather than the interest rate or how much the loan was costing them in finance charges. As long as people could fit the payments in their monthly budgets, they would take out the loan.

Even though this thinking still seems to persist today, ``banks will be embarrassed into dropping their rates sooner or later,'' says Robert Heady, publisher of Bank Rate Monitor, a North Palm Beach, Fla., newsletter. ``These guys are going to have to get off the dime and get their rates down. There's no getting around it.''

Mr. Heady suggests that consumers wait a few months, if possible, before taking out a consumer loan.In the meantime, you can add to your savings for a larger down payment, which will reduce the amount of money you have to borrow.

Be careful with this strategy, however. If you're trying to time the low point in consumer loan rates, you could find they've headed back up before you realize they hit bottom. One of the anamolies of these loans is that while their ``lag time'' behind declining prime and mortgage rate is quite long, there is very little lag time when rates are rising.

If you can't wait, try to shop for loans. In some cities, rates on consumer loans may range from 16 to 20 percent. You may even be able to get a lower rate on your bank card than is available for unsecured personal loans.

In addition to rates that vary among banks, some of them have started adding separate fees for small loans, and the size of those fees can vary from one lender to another, says Rosemary Walker, a professor of family economics at Michigan State University. These fees may seem small, say $20 to $50 on a $5,000 loan, but there seems little reason to pay them if you can avoid it.

``You should look at getting a loan as buying money,'' she says. ``Interest rates and fees are the price you pay for that money, so shop around for the best price just as you would for any item.''

Some banks have started offering adjustable rates on some consumer and auto loans, similar to the adjustable-rate mortgages. If the opening adjustable rate is at least 2 percent less than the best fixed rate you can find, it may be worth it. But stay away from lenders who offer little or no such rate incentive and try to tell you that along with the risk of higher rates, you also have the opportunity for lower rates in the future. The greater risk is yours, not the lender's.

Finally, look carefully at advertised loans with very low monthly payments. To take advantage of consumers' preference for low payments, many lenders have extended the term, or number of years, it takes to pay off a loan. A three-year car loan used to be the standard. Now it's at least four years, with many auto dealers advertising loans for five years, or even six or seven years on more expensive models. If you sign up for one of these loans, remember that each additional month you spend paying it off, the more you pay in finance charges.

If you would like a question considered for publication in this column, please send it to Moneywise, The Christian Science Monitor, One Norway Street, Boston, Mass. 02115. No personal replies can be given by mail or phone. References to investments are not an endorsement or recommendation by this newspaper.

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