Use comparison rates wisely
Why are comparison rates so important?
When comparing home loans, personal loans or any case where a lender is providing credit; there are many different features to compare and sort through. In the midst of comparing you may find there are two confusing terms; the interest rate and the comparison rate.
What is a comparison rate?
A comparison rate is:
– The total interest rate charged on a loan including most fees and charges
– Calculated over the course of the loan’s lifetime
– It is a rate that all lenders by law must display in advertisements
Please note: Infochoice displays these rates in our full comparison tables for each type of loan.
The comparison rate is a formula based on the following things:
– The actual interest rate charged by the lender
– Fees & Charges that may include, but are not limited to: annual fees, establishment fees, valuation fees, documentation fees, settlement fees.
– The loan amount
– The loan term
– How often you will service the loan
A comparison rate is designed to reflect the total annual cost to a borrower of a loan. This allows the borrower to have full disclosure before making any decisions.
The total figure is then converted into a single percentage to detail the true costs and in some circumstances is also known as the “true rate”.
What is an interest rate?
An interest rate is:
– Generally the more attractive number when comparing loans/types of credit
– The percentage of the loan that you pay in addition to the original loan amount
– Does not include additional charges or fees, such as but not limited to: annual fees, establishment fees, valuation fees, documentation fees, settlement fees.
What isn’t included in a comparison?
Unfortunately there are a few instances in which some fees and/or charges aren’t calculated within a comparison rate. This may include but is not limited to: Account features such as repayment flexibility, redraws and offset accounts which vary widely among loans and can reduce their cost significantly. Other fees may include: Stamp duty, conveyancing fees and/or late payment fees.
In summary, a comparison fee addresses all interest costs, upfront and ongoing fees throughout the loan entirety. Whereas an interest rate only details the loan rate before additional costs.
InfoChoice warns borrowers to research before choosing a loan and to beware of the fine print. Remember to take into consideration the fees and charges that may not be included, knowledge is power, or in this case knowledge is money.