What is a comparison rate?
The Comparison Rate is an indicative interest rate that is designed to help members identify the ‘true cost’ of a loan. The Comparison Rate takes into account the interest rate and “ascertainable fees and charges” that relate to the loan, in an attempt to express some of the costs of a loan into a single (comparison) rate.
“Ascertainable fees and charges” are those that are definitely payable during the life of the loan – such as application fees, monthly or annual charges, cost of valuation and legal fees.
What isn’t included?
The Comparison Rate does not include fees and charges that may occur or are based on some future “event” – such as redraw, early termination fees, progress payments or fees charged by some institutions when you decide to switch lenders. In addition, government and statutory charges are not included – as these are standard irrespective of the type of loan or who the lender is.
So, whilst the Comparison Rate is a useful tool for comparing the cost of different loans, it should be remembered that it doesn’t provide the total picture.
What to bear in mind
It’s important to consider all the features and benefits of the loan – rather than only focusing on the Comparison Rate. A Comparison rate does not take into account all the factors that should be considered when comparing different loan offers from different financial institutions / lenders. Benefits such as redraw, 100% offset and ability to make additional repayments / flexible repayment periods are not included within a Comparison Rate – but they can make a difference to the attractiveness of a loan.
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