Whether you’re shopping for a home mortgage or a car loan, comparison rates are an essential part of the process. Loans of all shapes and sizes can be complicated, so it’s important to recognize the significance of each term used in the process.
In Australia, lenders are legally required to show customers the comparison rate. In simple terms, this is the “true cost” of a loan. The more you understand about the overall cost, the easier it is to make a sound financial decision. Loans can be a powerful part of any financial journey, whether you’re paying down debt or creating wealth. That being said, you never want to enter a loan lightly. In this guide, we’ll explore everything you need to know about comparison rates.
What Is a Comparison Rate?
To start, what’s the simple definition of a comparison rate? This is a number used to compare loans that last the same set period of time. While you might already be familiar with the interest rate, this is just one of the many factors that go into the long-term cost of your loan.
A comparison rate includes the big-picture costs all added together, including:
- How much the loan is for
- The loan term
- Payment frequency
- Interest rate
- Additional fees
When you look at all of these factors together, you see a clearer picture of the real cost of the loan. While it’s tempting to choose the loan that has the lowest interest rate, this might not actually be the cheapest option. Two loans might look the same at first glance, but have vastly different costs based on payment terms, fees, and so on.
Thanks to the comparison rate, you can quickly understand what the true cost of a loan might be. However, this only applies to loans with fixed interest rates. If you’re looking into terms with variable interest rates, the overall cost likely shifts over time. This is another reason why it can be helpful to work with a professional financial expert before agreeing to new loan terms.
What Isn’t Included in the Comparison Rate?
Though the loan comparison rate is a helpful tool, it’s not the only thing you can rely on when choosing the right loan term for your situation. There are some factors that simply aren’t taken into consideration, and these can create a big difference over time. Some examples that aren’t included are:
- Government stamp duty
- Mortgage fees
- Late payment fees
- Early termination fees
- Conveyancing fees
As the average loan cost rises each year, especially for mortgages, comparison rates are less helpful today than they were in the past. If you choose to refinance your loan or change terms later, your original comparison rate no longer applies. While it’s a helpful tool, loans are too complex to sum up in a single number.
How to Use Comparison Rates
Now that you understand what loan comparison rates are and how they work, how exactly can you use these rates to your advantage? It’s true that loan comparison rates don’t explore every avenue, and they don’t include every fee you might encounter during the life of your loan. Still, they serve an important purpose in understanding the cost of a loan.
If you see widely varying loan comparison rates between lenders, this could be a sign that there’s something else going on. It would be a smart idea to ask your lender to disclose all the factors of their comparison rate to get a clear image. If you notice anything off, this could be a sign of hidden fees or costs. However, most loan comparison rates are pretty standard across the board for Australia’s top lenders.
While using a comparison rate calculator for your mortgage can be useful, remember that these all default to standard terms of $150,000 over 25 years. In decades past, this was an accurate reflection of the average home loan. Today, that’s no longer the reality. Adjust your calculator to reflect the true value of your loan to get a more reliable comparison rate.
As you likely already know, a loan should never be something you rush into. Taking the time to explore your full scope of options can save you significant money over the life of your loan. While you can possibly refinance later, it pays to find the best deal sooner rather than later.
Understanding the Role of Comparison Rates
Ultimately, comparison rates are just one tool in your financial wellness kit. Having access to clear information is one of the best ways to stay mindful of all of your options. A comparison rate is a vital piece of the loan puzzle, but it shouldn’t be the only factor you consider before signing off on a new loan.
Need help navigating the best loan options? The professionals at Debt Busters are here for you. Talk to our loan specialists today on 1300 368 322 to make sure you’re familiar with the right options for your goals.