|What is a comparison rate?
A comparison rate is a tool to help consumers identify the true cost of a loan.
It is a rate which includes both the interest rate and fees and charges relating to a loan, reduced to a single percentage figure. For example, a bank’s advertised interest rate may be 5.59% and its comparison rate 6.85%.
When must I be provided with a comparison rate?
Comparison rates only have to be provided for:
- credit which is wholly or mainly for personal, domestic or household purposes;
- fixed term credit – that is, credit that must be repaid within a specified time period. (A home loan with a term of 25 years, and a car loan with a term of 5 years are examples of fixed term credit. In contrast, credit cards, which do not have to repaid within a particular time period, are examples of continuing credit).
From 1 July 2003:
- a comparison rate must be included in any advertisement for fixed term consumer credit which contains an interest rate; and
- consumers must be provided with comparison rate schedules – that is, lists of comparison rates for a standard range of loan amounts and terms – by credit providers, finance brokers, and linked suppliers (suppliers of goods and services who refer customers in need of finance to particular credit providers).
How is a comparison rate calculated?
Comparison rates are calculated in accordance with a standard formula, which takes into account:
- the amount of the loan;
- the term of the loan;
- the repayment frequency;
- the interest rate; and
- the fees and charges connected with the loan, except for
- government charges, such as stamp duty or mortgage registration fees;
- fees and charges which may or may not be charged, because they depend on some event which may or may not occur (for example, fees for early repayment or redraw fees); an fees and charges which are not ascertainable at the time the comparison rate is provided.
What is a Comparison rate Schedule?
The schedule details the various rates that apply to the lenders products at various loan amounts and various loan terms