Tuesday, November 16, 2010

Negotiating a Line of Credit Interest Rate

Commentators frequently recommend that people negotiate the interest rate on their mortgages, lines of credit, GICs, and other loans and investments. But not much is usually said about how to go about such negotiations. I don’t have all the answers, but I did recently negotiate for a better interest rate on a line of credit. The process surprised me in a few ways.

I have an unsecured line of credit that has been mostly dormant for 17 years. A recent temporary need for money led me to use it and find out that the interest rate I’m being charged is prime+4.5%. After a quick poll of friends, it seemed that I could certainly do better. I decided to do what I could to reduce this interest rate as quickly and easily as I could.

I figured the easiest way to proceed would be to simply call the bank’s general phone number and provide an update on the 17-year old information they have about me. Surely it would be obvious that my financial circumstances warrant a lower interest rate.

Unfortunately, the call didn’t go at all as I planned. The call centre person said he couldn’t just reduce my interest rate. I’d have to apply for a new LOC which would involve a credit check. This last bit of information was conveyed with a tone implying that having your credit checked is a fate worse than death. To avoid such calamity I should go to my bank branch where they might be able to help.

The next day I called my branch, made it through the telephone menu system, and somehow ended up talking to someone at a call centre in another city. I tried my first approach again, but was assured that getting a lower interest rate was some sort of impossible goal without first talking to someone at my branch.

The call centre connected me to my branch where a bank employee assured me that we couldn’t handle this over the phone and I’d have to make an appointment to visit a specialist at the branch. After insisting that a delay of more than 2 weeks was unreasonable, I got a Saturday afternoon appointment.

My wife and I arrived on Saturday armed with every piece of paper we could think of that might be needed. In the first 30 seconds of the meeting the bank representative told us that she was prepared to use her discretion to give us a 1% interest rate reduction. My first thought was that surely this could have been handled over the phone, but I bit my tongue.

The bank representative also said that this 1% reduction was all anyone at the branch had the authority to offer. My first two attempts at asking who did have the authority to authorize a bigger reduction met with a stream of words that ended with repeating that 1% was all the branch could offer.

I can see where many people would have given up at this point. It seemed impossible to get anyone with some authority to actually look at our financial situation and make a sensible determination of an appropriate interest rate for our LOC. I decided not to be put off and insisted that the bank must employ someone with the authority to set a reasonable interest rate and that I wanted to deal with this person.

The representative went off to talk to a superior for quite a while and returned to announce that she could take our information and send it in to some sort of centre where they would take into account our “entire banking relationship” and determine an interest rate. This finally brought us to the point where she took our personal financial information.

At this point the most surprising part of this story happened: she didn’t want to know my income! She took all kinds of information about assets and liabilities, but even after I brought it up, she still didn’t want to know my income. This didn’t give me any confidence that the bank would make a sensible choice of interest rate.

When the promised date for an answer came and went, I started leaving messages. A few days later the bank representative finally told me that my LOC interest rate would be lowered to their base rate, which is prime+3%. That still doesn’t seem great, but taking off 1.5% helps. The term “base” is amusing; it clearly implies that I’m getting the very best rate possible, which seems unlikely. At least I’m not paying more than this so-called base rate.

After all this, my lesson is that the bank’s approach wasn’t so much to say no as it was to avoid answering the question. Their strategy was to put me off and hope that I would give up. In a sense they have partially succeeded because I probably won’t bother to go to one of their competitors looking for a lower interest rate.

17 comments:

  1. I managed to have prime+2.0% for my unsecured LOC and prime+0.5% for my secured LOC (it went up from prime :( )
    Don't give up. I usually find that when I compare with what another bank gives me, its easier. I also tend to have a dedicated person to talk to and I can easily meet that person. It's not no-name teller ...

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  2. When I first set up my LoC, I negotiated the rate in person with one of the loan officers at the bank branch, but that came after 2 phone calls to EasyLine and then to the branch itself.

    My income only seemed to affect the size of the LoC, but not the interest rate (that part was taken care of over the phone) -- for the rate, I seemed to only make progress when I pointed out that I had assets in Waterhouse, and that if I couldn't get a LoC, I could instead take margin from there (and margin at the time was I think prime + 1). Not sure if it was the fact that I had collateral, more relationships with TD, or just the competition from margin that eventually got me the rate I was looking for...

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  3. @Passive and @Potato: The lesson from both your comments seems to be that I need to get competing offers before my current bank would consider reducing my interest rate further. As far as I can tell, this is my only next step (not counting just paying off the LOC).

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  4. Too funny!
    This is why it's better to be a bank shareholder than customer.

    My experience is that when you do find someone helpful and develop a relationship, they're usually VP before you know it and you have to start your search all over again!

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  5. I was in renewing my mortgage 3 weeks ago and asked about getting a better rate on my unsecured LOC as well. The rep told me she'd 'send a request in' and get back to me. Not surprisingly, I haven't heard back from her. Love to know where those 'requests' are sent.

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  6. @Chris S.: Fortunately, I'm bank shareholder in addition to being a customer. I guess I don't talk to bank representatives often, but they seem to have high turnover.

    @Scott R.: My strategy on the 'send in a request' front was to ask when to expect an answer and then leave a message every other day until I got an answer. I doubt that I would have received an answer without the persistent (but polite) messages.

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  7. Great post. I was also offered a LOC without asking about income (in fact, the bank manager asked me one day); I suspect it was based on credit utilization. It may have helped I did business banking with them (the lesson partially being there's a huge downside to automating retail banking- no one wants to, or can, help you in branch).

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  8. @Thicken: It seems that the trend toward automating all customer interaction continues. I have an image of a small group of people within a bank developing scripts for all other bank employees to follow in every situation. Other big businesses like Bell and cable companies have been going in the same direction for some time now.

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  9. Amusing story, Michael. I thought for sure they wanted you to come in so they could sell some financial products. But it looks like they are hoping the hassle of making a trip will discourage customers from pursuing a better LOC rate.

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  10. @Larry: I hadn't thought about the cross-selling opportunity. I don't recall any attempt to sell other products. However, I did take a no-nonsense approach to the meeting.

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  11. I once negotiated prime for my secure L of C........I was in the process of transferring our mutual fund portfolio (later recanted) and, while doing so, asked about getting the preferable prime rate. Et voilà!
    The lower rate remained until the rates were jacked for everyone including the employees a year or so ago.

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  12. @Anonymous: LOC interest rates seem to have changed for just about everyone after the credit crisis. Now that I've got my interest rate down a little I intend to focus on paying it off.

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  13. I work for the bank but not on the credit side. LOC's have a certain amount of leeway and really it's competing offers that would sway them. Of real competing offers, not fake ones.

    Rates I are determined by a automated system and then fudged by a credit analyst based on relationship (how much other much you make them) and other circumstances that the system doesn't take into account.

    Also each bank views different borrowers differently. Some are more conservative.

    If they consider you just a rate shopper, they will be less inclined unless they really want you business. So it does pay off to have your accounts with one bank rather than spread thin. How many years you are with a bank is meaningless.

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  14. @Anonymous: Thanks for the insight into the bank side of the negotiation. When the bank representative said that someone would choose an interest rate based on my total relationship with the bank, that gave me a hint that my other business with them might be a factor.

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  15. I don't play fair when negotiating my rates - use every dirty tick in the book. Specifically, I don't negotiate until I have leverage, which is usually at mortgage renewal.

    First i will apply for a mortgage at another institution - this triggers a credit check which is 'discovered' by my bank - this shows I am serious about moving (I am not).

    Second I will get a couple of 'extra' no-fee credit cards a couple of months before the renewal. I have found that canceling these cards is a requirement for a lower rate, so I do - never used the cards anyways.

    If I get really desperate (I did once) I will call another branch of my bank as a new customer and see what rate they will give me. It worked - got 75 points off my mortgage rate. I *know* they can give me the reasonable rate I am asking for - they just need a push.

    When negotiating for the best mortgage rate I will have then throw in whatever they can - this usually means a lower rate on my LOC and HELOC.

    Personal relationship does help. I have a good one with my 'personal' banker, and I believe she does go to bat for me with the company. The banks are so big and have so many customers that they must use formulas to determine the value of those customers. How much money are you going to bring in for them every year? If you have a big mortgage and tend to pay interest on your LOC you are more valuable - doesn't really matter how much money you make.

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  16. @Anonymous: It sounds like you play this game to win. So, the message is to try to negotiate better terms for everything whenever you're bringing new business to the bank (or renewing old business). I'll have to keep that idea in mind the next time I have to deal with a bank.

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  17. Leverage is key. As a shareholder in most of the banks I want to see them maximize profits - to do so they must keep *your* interest rate high to maximize *my* profits. As such, if you are not offering anything (threatening to leave) then the bank has no motivation to lower your rate - they will keep you as a customer and you will pay more to borrow money.

    It's taken a few years to figure out the trigger points in their process but it still comes down to leverage - offer them something and they will offer something back.

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