We leave a lot on the table. Think back to the last time you negotiated something for your own personal life. Odds are, a lot of examples of where to go to dinner come to mind. But most people can’t pull to mind any examples of negotiating in their personal finances. They’ve never done it.

This is a real problem. It’s often easier to get better terms on a loan or debt than you think it is: all you have to do is know how to ask. By not negotiating, you cost yourself tens of thousands of dollars throughout your life. So why don’t we do it?

The Supermarket Fallacy

You go to the store. You pick up your apples, your eggs, your breakfast cereal and you throw them all into your cart. You might look for the sale tags, or you might not. Then, you head to the front of the store, wait in the line, and give them your payment information. You might present some coupons or scan an app for savings, but that’s it.

You go to the bank. You bring your proof of employment, your credit card statements, your photo ID. You might peruse the types of accounts available, or you might not. Then, you head to the back office, get the details of your new loan, and give them your payment information. You might ask a few questions about the next steps, but that’s it.

While these seem like similar activities, they are fundamentally different in many ways. The problem is, we have come to treat every transaction in our lives like a trip to the supermarket. We let the other party dictate the terms in the name of convenience. This is a phenomenon I’m calling the Supermarket Fallacy. 

We have come to believe that all institutions that handle our money are like the supermarket. They offer a product at a price, and we can either take it or not. But most loan products, from mortgages to credit cards, are a lot more like an auction house. You’re running the show. You just don’t know it. It’s time to take your power back.

How to Break The Cycle

This cycle of going with what you’re offered is costing you a lot of money. You need to break out of it now. Remember that financial services companies are competing with one another for your business. If you have a solid understanding of your credit score, and always use your credit responsibly, they will be banging down your door to try to sign you up. This puts you in the position of power. They need you a lot more than you need them. Use that to your advantage.

Do Your Homework

The easiest way to get a better rate on a loan is to do a little bit of homework. Most banks publish their interest rates right on their website. Find another bank nearby, see if they have a lower rate, and ask for the bank you’re currently working with to match that. There’s a good chance they will. After all, you’ve proven that you know you have other options. If they won’t match the better rate, you can walk out and go straight to their competitor.

If the information isn’t available, you can still come prepared. Know what your FICO score is. Research the rates that people with similar scores in similar situations can get. Knowledge is power here, and every little bit you can gain provides you a little more leverage.

Friends and family are also a valuable resource here. Ask those close to you who have been in a similar situation if they did any negotiating, and how they did it. If they were recently in your situation and are willing to talk about it, ask about the terms of their deal. Know that interest rates change though, so you probably can’t get the exact same terms as them. Especially if their terms are a couple years old or more.

Know Your Worth

You are a valuable customer. The lenders are competing for your business, not the other way around. Remember that when you go in to meet with them. They may try to confuse you with big words, or they may tell you what you’re asking for is impossible. You’ll know whether it’s possible or not though because you’ll have done your homework.

Knowing exactly how much you are worth gives you a massive advantage. Let’s assume you are getting a loan from a bank. The bank is putting up the money, sure. But where do you think banks get their money from? At the end of the day, the bank needs you to take out that loan more than you need the bank’s money. 

As long as you have a loan, you’re paying them interest. They need that interest to go out and finance the next person’s loan or even cover ATM withdrawals. Like your checking account probably has a minimum balance, your bank is required to keep a minimum amount of cash on hand. That’s often why they impose that minimum on you. 

If a bank doesn’t have that minimum at the end of the day, they have to borrow money. They can get it from another bank, or from the Federal Reserve as a last resort. Either way, they’re paying interest to borrow it. In other words, you paying any interest keeps your bank from having to pay it. They like that.

They need you. When you know that, you gain the upper hand. After all, they’d rather be paid a few percentage points lower interest than none or having to pay it themselves.

What You Lose By Following The Status Quo

Following the status quo helps our society stay afloat. It’s ingrained into us to work within the confines of the system, and for good reason. The system works well most of the time. Think of how much hassle it would be to try to barter at the supermarket every single time you wanted a loaf of bread. We have decided to do things the way we do because it works. 

Sometimes it doesn’t though. When it comes to your finances, and your loans especially, you can lose a lot by just doing what you’re told.

A Sense of Accomplishment

Let’s talk about how it feels to get a loan. When you have “bad” credit, or you’ve never gotten one before, it’s nerve-wracking. You don’t know how the process works. You don’t know if you’ll be approved. You don’t know what documents you need. 

Then, it happens. You get that approval, and you’re over the moon. You can’t believe they fell for it. You slipped through the cracks. Maybe you’re worried they’ll realize they made a mistake and take it back.

Even when you have “good” credit, or it isn’t your first rodeo, getting a loan is a stressful process. Most people are thankful when it’s over and they know they’ll be alright. I can’t be sure of this, but it wouldn’t surprise me if banks do that on purpose. They don’t have to use fancy jargon, or drag the process out, or make you come in for that many meetings. By doing that, they take the power from you and make you feel relieved when it’s over.

What you’re missing there is the accomplishment of having done anything. You provided documents, sure, but you weren’t really involved in the process. You waited on the bank to tell you the next step. Now imagine that you do your homework, know your worth, and show up ready to negotiate. 

The bank can’t throw you off with jargon, you know the language. They can’t tell you that’s the best interest rate on the market, you know the market. More importantly, you become an active participant in the loan process. You're no longer a bystander. 

You can negotiate your interest rate lower, or your purchase price on a big-ticket item such as a car down. You can slash your costs and accomplish something. 

Negotiating allows you to actually put in the work of securing your money. Not only will you be less stressed because you’ll be clued into the process, but the feeling of elation at the end will also be so much greater.

Money Money Money

This one is probably obvious by now, but I want to reiterate: negotiating can save you thousands of dollars. Lower interest rates on credit cards allow you to pay off your debt that much faster. A lower sticker price on a new car lets you drive off the lot a little less worried about depreciation.

It’s easy not to use the coupon though. We often leave savings on the table because it’s easier not to hassle with it. There’s an easy mental trick to get over this: don’t think of the money you save by negotiating. Think of the money you lose by not negotiating. In your mind, set your rate or your price based on what you think you can negotiate. Not the starting point the bank or lender offers you. 

Imagine the loan closing at those negotiated terms. Then, think of every single penny or percentage point of interest above that as a financial loss. That’s what it is. You are losing that money, never to see it again. This trick will make you fight and negotiate a lot harder.

Behavioral economists have proven time and time again that humans are loss averse. That is, we care a lot more about losing something we already have than gaining something new. By framing your lack of negotiation as a loss, you can play to that. It costs you to accept the status quo. Get in the ring and negotiate.

When Not To Negotiate

Okay, I know I titled this post “negotiate everything,” but I was being hyperbolic. You shouldn’t actually negotiate everything. That would be exhausting and would make people hate you. Instead, focus your attention on the areas of negotiation that are most likely to pay off, and will provide you the most benefit if they do. Loans and interest rates are prime examples of that. Sometimes, you shouldn’t negotiate.

When Costs Outweigh Benefits

Don’t forget that your time is worth something. Know your own value. Factor that into your calculations when you decide whether to negotiate. Let’s say you can negotiate the price of something down by $20, but it will take you 4 hours to do so. Some quick math tells us that you have saved yourself $5 for each hour of your time. If you were employing yourself to negotiate, you would have violated federal labor laws. 

I hope you can see that your time is worth more than $5 an hour. When you decide whether to negotiate, you have to factor in the opportunity cost. You can’t get any of your time back in life. So how do you know if it’s going to be worth it?

In general, the bigger the loan, and the more you can get the interest rate down, the more likely it is to be worth it. Negotiating even a single percentage point lower on your mortgage can save you well over $15,000. Let’s say the negotiation takes the same 4 hours as before. Now your payoff is $3750 per hour. Not a bad hourly rate.

It might not make sense to lower the APR on the credit card you only owe a few hundred bucks on. It would make sense to try to get it down on the card with thousands on it. It’s all dependent on the loan, how long it takes you to negotiate, and how much you can reduce it by.

When It’s Obnoxious

Don’t negotiate at the grocery store. Nobody likes the guy who dents the can then asks for a discount. Or the woman who holds up the line trying 100 different coupons, none of which are even for the store she’s in. Know the store’s policies before you go in, and stick to those policies. 

In general, stores are transactional. Whether they sell you coffee or meals or groceries or electronics. If you don’t like their prices, sure, you can go to their competitor. You can even ask them to match a price for the exact same item you found online. This makes sense with big-ticket items like electronics. Again, know the store’s policies. If they don’t price match with Amazon, you’re only wasting everyone's time by asking them to match Amazon’s price.

Don’t negotiate when it isn’t accepted practice to do so. Generally, this means don’t negotiate when you complete a transaction by handing someone behind a counter your credit card to swipe. Loan terms are okay to negotiate. The price of major items is okay to negotiate. The price of your sandwich is usually not. Doing so only makes you look like a jerk or a cheapskate. Neither is a good look.

Conclusion

Negotiation is a powerful tool in your financial toolbox. It allows you to get out of debt faster, worry less that you’ve overspent, and spent more money on your Hearthstones. The first time you negotiate can be stressful. It’s important to come to the table prepared, both with knowledge of yourself and the prevailing markets. Learn the jargon. It can’t hurt you.

This isn’t to say negotiation is the end-all-be-all. It also doesn’t mean you should take out loans willy-nilly to negotiate them. But when you negotiate well and negotiate smartly, you will unlock so much potential. You will free up funds to live a life that excites you.

Don’t know where to get started? Schedule a free consultation with me and we’ll talk through it. I help my coaching clients with exact scripts they can use to negotiate different loan types. Now get out there and negotiate. If you don’t fight for yourself, nobody will.