Use comparison rates wisely

All lenders must now include "comparison rates" in advertisements for their home loans and personal loans to help consumers work out the 'true' cost of the loan. Infochoice displays these rates in our full comparison tables for each type of loan. Comparison rates are based on the average annual percentage rate (AAPR) which wraps up interest payments and fees and expresses all these costs in one rate. It is designed to reflect the total annual cost to a borrower of a loan. InfoChoice warns borrowers not to rely solely on these so-called 'true rates' when choosing a loan and to beware of their shortcomings. A comparison rate that helps consumers compare loan costs is welcome given the array of different loan types, rates and fees. However, there is a danger comparison rates will lead some consumers to oversimplify their loan choice and not look beyond the price of a loan to the suitability of features. A comparison rate :

• offers a pricing comparison only, addressing interest costs and the known upfront and ongoing fees but not early repayment fees or government charges
• doesn't take into account features such as repayment flexibility, redraws and offset accounts which vary widely among loans and can reduce their cost significantly
• on any loan will vary depending on the term how much you borrow - choose a loan based on its comparison rate and you may well find the true cost different for the amount you want to borrow
• this especially applies to fixed rate loans - ask the lender or broker to give you the comparison rate specific to your loan amount and term
• can be misused by lenders who advertise a loan with a low comparison rate, then try to upsell you to a more expensive one

Comparison rate legislation under the Uniform Credit Code came into effect for all Australian states on July 1, 2003.