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Weighing Up Comparison Rates
Interest Rates
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A comparison rate is determined when the cost of interest payments and fees is combined into one rate to give borrowers an idea of the total annual cost of a loan. This rate is also known as the average annual percentage rate (AAPR).
Since 2003, all Australian lenders have been required to provide a comparison rate as a point of reference for borrowers when advertising home and personal loans.
The idea of comparison rates is that borrowers can see the "true" cost of a loan. With the number of loan types, different interest rates and associated fees, having a comparison rate is useful in comparing loan costs.
Although referred to as the "true" cost of a loan, it's important to remember that a comparison rate is a pricing tool only and doesn't factor loan features in its comparison. A basic, no frills loan may have a low comparison rate, for example, but these types of loan often don't have the features and flexibility of other loans, such as the ability to make extra repayments without penalty.
A comparison rate evaluates the cost of interest and the upfront and ongoing fees, but doesn't allow for government charges or early repayment penalties that you may incur throughout the year. A comparison rate doesn't account for other features such as redraws and offset accounts which can reduce the cost of a loan significantly over time.
The costs associated with any loan will depend on the term of the loan and how much you borrow, so ask for a comparison rate based on the amount you want to borrow to get an indication of what it will actually cost you. Don't be duped by lenders who may advertise a loan with a low comparison rate when the true cost to you will be significantly higher.
While it is a good idea to use the comparison rate as a guideline when choosing your home loan type, don't depend entirely on it when it comes to making the final decision. Speak with your financial broker and shop around to find out which loan is best for your needs.
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