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Shop around when borrowing.

Four out of five Americans fail to shop around when they borrow money, according to an Ohio State University study. "People would never think of buying the first refrigerator or television that they see, but they don't apply the same principles to their search for credit," indicates Sherman Hanna, chairman of the Department of Family Resource Management. "Most people will contact just one lender when they need a personal loan, not realizing they could possibly save a significant amount of money if they were more selective."

Hanna and doctoral student Regina Chang analyzed the behavior of 574 consumers who had borrowed more than $500 the previous year. They found that only 20% of those surveyed tried to obtain comparative information on creditors or credit terms before taking out their loans.

Education was the most important factor related to comparative shopping for loans. Consumers with a college degree were three times more likely to shop for a loan than those without a high school diploma, after factors such as income and size of loan were taken into account.

The middle-income consumers were about twice as likely to shop for a loan as otherwise comparable low- or high-income ones. Lower-income consumers may search less because they fear rejection, while higher-income individuals may find the search procedure too expensive in terms of lost wages and time.

Consumers seeking a loan of more than $2,500 were about twice as likely to comparison shop as otherwise similar consumers seeking a smaller loan. Above the $2,500 level, the predicted level of shopping did not increase as the size of the loan increased.

Hanna believes that the study has major implications for consumer education and public policy. "People today get so much of their information on consumer goods from advertising in newspapers and on television. Yet there are very few advertisements for loans, especially on television. There should be better disclosure of cost information in an easily understandable way and better education programs to provide basic knowledge on credit terms and the computation of finance charges. People need to be aware of the differences in loan costs and to become more confident in what questions to ask when shopping for a loan. There are best buys' out there it consumers are willing to look."
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Publication:USA Today (Magazine)
Date:Dec 1, 1993
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