The line between personal and business finance is extremely blurry when it comes to small businesses and entrepreneurs. According to the Federal Reserve’s latest Small Business Credit Survey1, 14 percent of small business owners use personal loans and 86% of employer firms rely on their owners’ personal credit scores when applying for financing.
Using your personal credit to finance business expenses is often the only option for new and small companies without many assets or an established business credit history. However, it is important to compare multiple lenders before you make a choice. This way, you can find the best business loan interest rates.
Too many business owners go with the first lender that approves their applications because they are either too busy to apply to multiple lenders or they feel that all lenders offer similar rates to people with their credit score and income.
This can be an expensive mistake.
The price dispersion of personal loans
We recently analyzed nearly 160,000 loan offers to over 15,000 borrowers who recently applied for a loan. The study2 revealed that the average difference between the highest and lowest APR offer was 7.1 percentage points.
You can save a lot of money by comparing lenders when the interest rates offered to the same borrower vary so much.
Potential savings of comparison shopping loans
In the United States alone, consumers have a balance of $148 billion in personal loans3. Even a modest variation in interest rates could have a significant impact on the debt of American consumers. To illustrate, let’s assume that $148 billion balance has an average term of 36 months and a 13.5 percent APR. Dropping the average APR by only 3.5 percentage points to 10 percent would save Americans $3 billion a year.
Consider one borrower in the study’s dataset that had a credit score of 720 and applied for a $30,000 loan with a 36-month term. The lowest APR offered was 5.99 percent APR and the highest was 15.87 percent. This price dispersion on a $30,000 loan translates into savings of up to $5,050 — or 17 percent of the loan balance.
It is worth emphasizing again that this price dispersion is for loan offers to the same consumer.
Comparing multiple lenders when shopping for a personal loan to finance your business is a smart idea no matter what your credit score is. However, the study showed that borrowers with fair (580–669) and good credit (670–739) had the most to gain from comparing multiple lenders. Both credit score brackets had a price dispersion of 8 percentage points.
That does not mean that comparing lenders is not important when you have excellent credit. In fact, the data shows that comparing several lenders before you choose a lender could help you get better rates than if you increased your credit score by 100 points.
Every year, Americans overpay billions of dollars on higher-than-necessary interest rates. Often, borrowers don’t bother to comparison shop and just apply with one or two lenders.
It’s not hard to see why. Many business owners don’t have the time to invest a lot of time in comparing the terms and rates of lenders. Some may feel there is no point because all lenders offer similar interest rates to people with their credit score.
Others are concerned about the damage that multiple credit inquiries will have on their credit score. They have a point. Every hard credit inquiry on your report can ding your score by a few points.
SuperMoney can help save you money
The good news is SuperMoney allows you to prequalify and check your rates with a soft credit pull. Unlike hard credit pulls, these will not damage your credit score. Our loan offer engines can be used to compare personal, auto loans, and student loan refinancing.
Next time you get a personal loan to finance a new startup or business investments do yourself a favor and invest just a few minutes of your time comparing prices. There is no upside to paying more than you have to for a business loan. Just spending a few minutes comparing the loans you qualify for could save you thousands of dollars over the life of the loan.
Andrew is the Content Director for SuperMoney, a Certified Financial Planner®, and a Certified Personal Finance Counselor. He loves to geek out on financial data and translate it into actionable insights everyone can understand. His work is often cited by major publications and institutions, such as Forbes, U.S. News, Fox Business, SFGate, Realtor, Deloitte, and Business Insider.