The Low Down on Loan Comparison Rates – What you need to know
In 2003 it became mandatory for financial institutions to display comparison rates when advertising loans. Why? – The government could see a trend developing. Lenders were advertising loans with low interest rates, yet on closer inspection, the extra bank fees and charges affected the loan’s overall cost. It was becoming too hard for borrowers to compare one loan against another.
The government introduced mandatory comparison rates that made it easier for borrowers to compare the cost of loans before they commit. Basically, the loan’s costs are bundled up into one comparable rate, reflected as a percentage. For example, a bank’s interest rate might be 4.3%, yet the comparison rate could be 5.1%. Comparison rates are calculated using a formula that is controlled by the Uniform Consumer Credit Code.
Comparison rates take into consideration:
- The interest rate
- The amount of the loan
- The repayment frequency
- Loan term
- Bank fees and charges
An example:
Home loan A
- Interest rate: 4%
- Fees and charges: 0.5%
- Comparison rate: 4.5%
Home loan B
- Interest rate: 4.3%
- Fees and charges: 0.1%
- Comparison rate: 4.4%
In this example you can see that even though home loan A has the lower interest rate, home loan B will cost less.
Keep in mind, comparison rates don’t include:
- Early repayment and late payment fees
- Government fees and charges
- Lender’s mortgage insurance
- Default charges
There are other factors to consider when choosing a loan, including the loan’s features and flexibility.
Loan features
While comparison rates are important, it’s vital to look at the loan’s features. Do you have an option of a linked offset account? How about a redraw facility? Offset accounts are handy if you’re an excellent saver, and allow you to have a savings account linked to your loan. You are only charged interest on the outstanding loan amount, minus the balance of the offset account. This reduces the interest portion of your repayments and lets you pay off the principle amount sooner, reducing your loan term and saving money. A redraw facility is also a good option, and allows you to pay more on your loan, with the ability to redraw the money in the future.
Loan flexibility
How flexible is the loan? Does it allow you to make extra repayments along the way without penalty? It’s a good idea to read the loans terms and conditions so you have a good understanding of what you can and can’t do with your repayments.
Any kind of loan is a big decision and involves a process you need to fully understand. At Finance Detective, we are highly experienced with all kinds of loans and have a large network of lenders at our disposal. If you’d like to chat further about comparison rates or loans, give us a call on (08) 9289 7777.