What is a car loan comparison rate?

A car loan comparison rate is the interest rate of a car loan plus most fees and charges such as account keeping or administration fees, rolled up into one figure and expressed as a percentage per annum (per year). The comparison rate gives a would-be borrower a clearer understanding of how much their loan will cost instead of the base interest rate. The bare interest rate is often used in marketing as it’s usually far lower than the comparison rate on offer. Some lenders and banks advertise interest rates this way to attract customers. Since the comparison rate also includes most fees and charges, this allows you to calculate your budget and get a better estimate of how much you can expect to pay each month in repayments.

How to best use a comparison rate to calculate your repayments

A comparison rate gives you a standard formula so you can compare two (or more) loans side by side and get a complete picture of the cost of a loan. When you have a comparison rate, loan term, and amount you want to borrow, you can calculate your repayments using a car loan calculator. This will give you approximate repayment figures, so you know whether your loan is within your budget.

Let’s look at a $20,000 car loan with a five-year term. Here are two examples with differing rates.

Though Package A has a higher base interest rate, it is more competitive when fees are added in as a comparison rate. All rates and figures here are estimates.

Remember, some car loan comparison rates may be for different loan terms, amounts, and include facilities such as balloon payments. Make sure you are comparing loans that have the same terms and amounts to get a clearer picture of how much you’ll be spending.