With so many different finance options out there, it can be a challenge to compare apples with apples when it comes to car loans. Before choosing a car loan, make sure you understand what a Loan Comparison Rate is so you can effectively compare different loan options and make the best possible decision for your circumstances.
So what is a Comparison Rate?
A comparison rate not only includes the interest rate or Annual Percentage Rate (APR), it also includes a range of other fees and charges associated with the loan. This helps to give you a truer and more thorough idea of how much a particular loan product is going to cost you. For example, a loan may have a very low advertised interest rate, but also have several other fees and charges which can make the loan a lot more costly than it appeared. Comparison rates help you compare loan options from different providers more effectively using their ‘true cost’.
Comparison Rate Example
You are looking to buy a car for $35,000 and you have narrowed your finance options down to just two.
Option 1
Interest Rate 5.65% / Comparison Rate 5.96%
Option 2
Interest Rate 5.49% / Comparison Rate 6.59%
The difference between the interest rate and comparison rate is made up of all these additional fees and charges that we discussed earlier. When these fees and charges are factored into the comparison rate, it can then give you a very realistic and somewhat different picture of the actual cost of your finance.
Now at face value if you saw only the interest rates for each of the products above, you would instantly assume that option 2 represented better value. However, using the comparison rate, you can see that there is a large difference between the interest rate and comparison rate of option 2 compared to option 1 and that the overall comparison rate for option 2 ends up being higher than option 1.
Option 1 would cost you $155.74 in weekly repayments whereas Option 2 would cost you $158.09 per week. That equates to over $600 more throughout the duration of your loan even though it has a lower interest rate. This is simply through additional fees and charges.
For more information about how we can compare hundreds of products for you from over 40 of Australia’s most trusted lenders, simply speak to our friendly team today on 1800 538 287 or get a personalised finance quote online today.