What is a Comparison Rate?
A comparison rate is an indicative rate which helps consumers identify the ‘true cost’ of a loan. It is the rate that is calculated taking account the interest rate and fees and charges relating to a home, personal or car loan product, reduced to a single percentage figure. For example, a car loan for 8% for $70000 over a 5 year term has a comparison rate of 8.34%.
Why were Comparison Rates introduced?
From 1 July 2003, amendments to the Consumer Credit Code requires all credit providers, lenders intermediate suppliers and finance brokers to disclose Comparison Rates for regulated fixed term loan products, like home loans, personal loans, car loans, bike loans, boat loans and equipment loans. It is now mandatory in any advertisement to provide comparison rates if an interest is provided.
So how is a Comparison Rate calculated?
Comparison Rates are calculated in accordance with a standard formula set out in the Consumer Credit Code which takes into account:
- The amount of the loan
- The term of the loan
- The repayment frequency
- The interest rate and
- The fees and charges connected with the loan and which the customer will pay on the loan except for:
- government charges, such as stamp duty
- Fees and charges that may not be charged unless an event occurs such as early termination penalties
- Fees and charges which are not ascertainable at the time the comparison rate was provided
What is a Comparison Rate Schedule?
A comparison rate schedule details the various rates that apply to the lenders products at various loan terms and various loan amounts.
Click on the comparison schedule link to find out more: comparison schedule
A comparison rate can be a useful tool for comparing the cost of different loans, but it is important to consider all of the loan’s features and not just to focus on the comparison rate. It does not give you a complete picture of the total cost of the loan.
A comparison rate does not take into account some factors which make a loan attractive, therefore you should give careful consideration to whether these features are important to you and the effect they will have on the cost of a loan.