What is a Comparison Rate?
The comparison rate is an indicative interest rate that is designed to help you 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, so that it can be expressed in a single rate and more easily compared with other offerings.
'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 may not provide you with the total picture. It is really important that you also consider fees and charges that may be charged throughout the life of the loan.
What to bear in mind
It's also 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 or lenders. Benefits such as redraw, 100% offset and the ability to make additional repayments or flexible repayment periods are not included with a comparison rate - but they can make a difference to the attractiveness of a loan.