If you’re in the market for a car loan, or other types of financing for that matter, you may have noticed a specific term describing the interest rate – comparison rate. So what exactly is a comparison rate, and how does it differ from an advertised rate?
Why Refer to a Comparison Rate?
The intent of a comparison rate is to provide prospective applicants a more ‘complete’ representation of the total cost involved in taking out and fulfilling the obligations of the loan. Where this differs to an advertised rate is that the advertised figure focuses specifically on the underlying interest rate attached to the loan, and not the ancillary charges and fees.
With that said, a comparison rate incorporates most of the additional fees, not all of them. Therefore, a comparison rate is higher than an advertised rate, usually by some margin. If you rely exclusively on an advertised rate to make a decision, you run the risk of paying more for finance across the life of the loan as opposed to another loan with lower set-up and/or maintenance costs.
What Forms Part of the Comparison Rate?
As mentioned above, the comparison rate is a more thorough depiction of the overall expenses accompanying a loan. Therefore, not only is the comparison rate made up by the interest rate, but it also incorporates such things as the length of the loan, the absolute value of the loan, establishment fees, the repayment schedule, and other associated costs.
Take note however, that it typically does not include charges for things that are outside the scope of ‘normal’ obligations under the loan. That is, any charges for paying off the loan early will not be included in a comparison rate, nor will any government fees.
Should I only Look at the Comparison Rate?
While costs are the predominant focus for many who take out financing, there may be other features for applicants to consider. Because every financier will structure their loan in a different manner, some may offer particular perks with respect to flexibilities in making repayments or settling the loan early.
Some lenders may also offer the option to create a loan offset account or utilise a redraw facility. And then there is the matter of loan to value ratios (LVRs), which can vary between financiers depending on the extent of financing an applicant applies for. Ultimately, make sure any comparison loans are like-for-like in comparison, and that other features serve as a point of differentiation.
The Fincar team is here to help you with all your financing needs. Contact us today to help arrange your next car or equipment loan.