You’ve probably seen it beside the interest rate when shopping around for loans, but just what do we mean by comparison rate and how does it help you?
The comparison rate is a really useful tool to help you compare loans and get the most bang for your buck, just as long as you know how to use it effectively. To help you with that, Mozo has compiled some important information and handy tips all about it, so you can go into your search for a competitive loan well prepared.
What is the comparison rate?
Also known as the Annual Percentage Rate (APR), the comparison rate is an indicative rate, given as a percentage of your loan amount, which is designed to give you a more accurate idea of the ‘true’ cost of a loan. It does this by taking into account not only the interest rate of your new loan, but also any fees or charges that might change its true value.
It’s now compulsory for banks to show the comparison rate when they advertise a loan, and you’ll find it on all of Mozo’s comparisons as well, but there are always loopholes. You should be aware of how the comparison rate works, so that you can ensure you’re getting what you pay for with your loan.
What does the comparison rate cover?
The beauty of the comparison rate is that it takes into account many of the factors that might have a big impact on how much your loan will cost you both on a monthly basis and all up. Here are some of the things it covers:
- Loan principal. This refers to the actual amount you owe your lender.
- Term of loan
- Repayment frequency. Most home loans offer monthly repayments by default, but many lenders also give you the option of switching to fortnightly or weekly repayments. Since interest is calculated daily, making more regular repayments could reduce the interest you pay over the life of the loan and potentially save you thousands.
- Interest rate
- Ascertainable fees and charges. This includes any extra fees that are a definite cost of the loan, like annual or monthly account fees, valuation, establishment, or settlement fees.
What doesn’t it cover?
Nobody's perfect, and the comparison rate doesn’t cover everything. There are some costs that aren’t taken into account, even if they will affect the cost of your loan. It’s important to keep one eye on these excluded costs, because they might make a big difference in the long run. Here are some things the comparison rate doesn’t cover:
- Government charges (such as stamp duty, a tax charged for property purchases in Australia)
- Fees for extra services that may or may not apply to your loan. These include things like redraw or early repayment fees. If it’s an optional cost, it won’t be included.
- Fee waivers. Any extra savings from things like bonus offers or bundling packages aren’t included.
- Extra features. Options like offset accounts, a redraw facility or extra repayments can make a considerable difference to the price of your loan, but can’t be accurately accounted for as part of the comparison rate. So in addition to the comparison rate, it's important to think about the features offered by various loans and how much they matter to you.
How is the comparison rate calculated?
The comparison rate that you’ll see advertised is only an indication of the value of a loan. That means that it isn’t calculated on your exact loan details, so it can’t give you an exact amount that you will end up repaying.
For home loans, the comparison rate is uniformly calculated on a loan of $150,000 over 25 years, with monthly principal and interest repayments. Car loans are usually based on a $30,000 principal over a 5 year term, while personal loans are generally based on $10,000 over a period of 3 years, unless stated otherwise on the comparison.
So while the comparison rate is useful in sorting out which loans are more competitive and making sure you’re comparing apples with apples, to find the dollar amount you’ll pay, contact your lender, or give Mozo’s financial calculators a whirl.
What else to look out for
The comparison rate is important for choosing the right loan for you, but it’s not the be-all and end-all. There are other important factors you should consider when choosing a loan, that can contribute to the cost and your budgeting plans in both the long and short term. Here are some of the key things, aside from the comparison rate, that you’ll want to consider:
- Your term and loan amount. The longer your term and the higher your loan principal, the more interest you’ll pay in the long run. But keep in mind that if you shorten your term, the trade-off is that your monthly repayments will be higher.
- The extra features. There are many extra features designed to help you pay off your loan as soon as possible, like offset accounts and extra repayments, and you should think about these when choosing a lender. Remember that extra features often come at a higher interest rate, so weigh that up against how much value you think you’ll get out of each feature.
- Fixed vs variable loans. Are you looking for stability or flexibility? If you like a monthly budget, a fixed term might be more your style, but if you want the use of extra features and the option to pay off your loan before the end of your term, a variable rate might suit you more. Some loans may offer you the best of both worlds with a split rate option that lets you split your loan into a fixed term and a variable term.
- Introductory rates. These can be great to start you off easy with a home loan, but you need to be wary of the revert rate. Your low introductory interest rate will only last for a set period at the beginning of your loan (for home loans, this generally ranges from 1 to 4 years), before reverting back to the standard rate. This standard rate is typically much higher than the rate you signed up for - sometimes by up to 1.00%! So before you choose one of these offers, make sure you check that the ongoing standard rate is competitive too.
Start comparing interest rates!
Now, armed with all this information about using the comparison rate to the best of your advantage, you can go out and find yourself a cracker deal on your loan! A good place to start is Mozo’s comparison pages, whether you’re looking for home loan, personal loan or car loan.
Head over to our interest rates comparison page to see the latest rates for home loans, savings accounts, term deposits and more.