What is a comparison rate?

Posted on Friday, November 15, 2013 - 00:00

Looking at so many loan products on the market, it's important to gain as much knowledge about what's on offer as possible. One term borrowers will encounter is "comparison rate."

Looking at so many loan products on the market, it's important to gain as much knowledge about what's on offer as possible. One term borrowers will encounter is "comparison rate."


What is a comparison rate?

A comparison rate, put simply, is a figure that includes not only the interest rate of the loan, but the fees and charges associated with paying back the loan.

It's designed for borrowers to accurately determine how much they will be paying back as a percentage. Simply looking at the interest rate doesn't give a complete picture of what it might end up costing.

It gives borrowers the chance to figure out the "true cost" of a loan compared to others on the market.

The parts of a comparison rate

A comparison rate takes into account a number of different factors. A comparison rate is made up of the amount of the loan, how long the loan term is, the repayment schedule, the actual interest rate and the fees and charges that come with the loan.

Note that a comparison rate does not include government fees and charges or circumstantial charges such as paying your mortgage or loan off early.

Comparison rate schedule

By law, the Australian Securities and Investment Commission's National Credit Code have set standard amounts and terms that lenders must provide.

Though handy for borrowers making comparisons, it doesn't necessarily mean these "standard" plans will fit your circumstances.

Things to consider

A comparison rate will give you a fuller picture of what you'll expect to pay back. A cheap loan may look good at first glance, but there's more to consider.

It's important to think about what features the loan provides, such as flexible repayment options.

Keep in mind that comparison rates don't factor in all the possible combinations of amounts and terms, like those in the comparison rate schedule.

A comparison rate for a $30,000 loan over five years may not be the same as the same amount over three years, let alone $50,000 over four years and so on.

When borrowing, you should speak to a financial professional about what comparison rates are right for your situation.

Comparing interest rates and comparison rates can make a world of difference to choosing which loan is right for you.

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