A comparison rate combines the loan’s interest rate with certain fees and charges into one annual percentage. The advertised interest rate shows the cost of interest only.
The comparison rate can help borrowers screen similar loans, but it is based on a standard example and does not include every cost or feature. A broker should compare the client’s actual amount, term, fees and expected use of the loan.
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What Is A Comparison Rate?
Australian credit advertising uses a prescribed calculation to show how specified fees affect the cost of a loan. This lets a borrower compare more than the headline interest rates.
The displayed figure applies to the example stated with the advertisement. A different balance or term can produce a different effective cost for the borrower.
What Is An Interest Rate?
The interest rate is the percentage used to calculate interest on the outstanding balance. Different types of loans can use fixed or variable rates. The same distinction also applies outside home lending, including some personal loans.
What The Comparison Rate May Include
- The advertised interest rate.
- Specified establishment or application fees.
- Specified ongoing fees.
- Other charges required by the prescribed calculation.
It may exclude costs that depend on borrower behaviour or optional features. For example, a redraw fee or a package feature may affect the client’s cost without changing the advertised comparison in the way they expect.
How To Use Comparison Rates
- Confirm that the loans use the same advertised example.
- Check the actual rate and every fee that applies to the client.
- Model the client’s intended loan amount and term.
- Compare features that can change how the client uses or repays the loan.
A lower comparison rate does not prove that a loan is suitable. Use it as one comparison input, then assess the contract, repayment structure and client requirements.
