Smart About Money: A banker who is against long lists of closing costs

Have you booked a ticket for an airline flight lately? The pricing options for seating, boarding priority and luggage allowed have exploded. It can be time-consuming to figure out the most cost-effective option. It’s all too easy to miss the “old days” when buying a plane ticket didn’t seem to involve so much nickel & diming.

Now hotels are getting in the game too. It used to be that only genuine resorts charged unavoidable “resort fees.” But now those unavoidable fees are getting more and more common, supposedly covering things that used to be included or that many guests never used in the first place.

With both airlines and hotels, it’s all about making the base rate look low and appealing. They have to cover their genuine costs somehow though, and add-on fees give them a way to do that.

But since the add-on charges either add to a traveler’s experience (as with priority boarding) or are absolutely required (resort fees), the reality is that your true cost is the sum of the base rate plus fees you choose to pay and fees you can’t avoid.

As a banker, I am really against separated-out closing costs on loans. I wish borrowers could confidently look at one number – the Annual Percentage Rate – for a loan they’re considering and know for sure it included both the interest rate and all fees and charges. Because then borrowers could easily compare loans’ true cost “apples to apples.”

For example, one lender often advertised that their mortgage fee was “only” $500. Which made their fees appear to be very much lower than other lenders’, a significant competitive advantage.

And they were telling the truth – their “mortgage fee” was only $500. But that wasn’t the only fee they charged! In fact, they charged all of the regular and customary fees other lenders charged. They were just pulling out one and shining a spotlight on that in their radio commercials, as if that was the only fee they charged.

Is that legal? Yes. Is that the right thing to do? I say no.

Imagine two lenders with the same exact rate on a loan – let’s say 5.00%. But their Annual Percentage Rates (which must be disclosed with a rate) are different. Lender A’s Annual Percentage Rate is 5.05%. Lender B’s is 6.95%.

As any lender or experienced borrower would know at a glance, Lender B’s loan has a lot of fees and charges they’re rolling in. Simply put, Lender B’s loan costs more.

But sometimes borrowers get confused with how loans are packaged. Sometimes unscrupulous lenders encourage confusion by just focusing on the rate or on one single fee, as if that told the whole story.

But that’s like saying a hotel room costs $175 a night and, oh – by the way – there’s a mandatory $40 a night resort fee. That room costs $215 a night (plus any taxes or municipal fees).

With loans, it’s the Annual Percentage Rate presented honestly and clearly that shows the big picture. It helps a borrower fully understand what they will be paying.

“Regular and customary” fees for getting on a flight, staying in a hotel or getting a mortgage should be priced into the whole package to save time for consumers and to make it easier for people to comparison-shop.

When one television advertiser gets laughs for making fun of “fee fees” in their commercials, you know consumers recognize that things cost what they cost. People don’t like the games some companies play. They value transparency.

Nick Maffeo is the President & CEO of Canton Co-operative Bank in Canton. “Smart About Money” is a regular column he writes for the Canton Citizen. Have a financial question you’d like to ask? Email to info@cantoncoopbank.com.

 

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