What is a Comparison Rate?
A comparison rate takes into account the interest rate, loan set-up costs, the term of the loan, and any other up front or ongoing fees associated with a loan.
When deciding on the loan that suits your particular needs, it's important to consider all features of the loan, not just the comparison rate. For example, features such as convenient Internet banking, a redraw facility or the flexibility to make your repayments, weekly, fortnightly or monthly are not included in the comparison rate.
The Comparison Rate is an indicative interest rate that is designed to help members 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, such as application or ongoing fees on a loan in an attempt to express some of the costs of a loan into a single (comparison) rate.
"Ascertainable fees and charges" are those that are definitely payable during the life of the loan.
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 should be remembered that it may not provide the total picture.
What to bear in mind
It's 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 / lenders. Benefits such as redraw, 100% offset and ability to make additional repayments / flexible repayment periods, such as being able to make loan repayments weekly, fortnightly or monthly, are not included within a Comparison Rate - but they can make a difference to the attractiveness of a loan.
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