Guide to Loan Comparison Rates

If you’re looking for a loan, it’s important to compare rates to make sure you’re getting the best deal you can afford. That usually means comparing loans from large banks, small lenders, credit unions, and even digital startups. However, as you begin the comparison process, you might realise things aren’t as easy as you thought. 

Loan rates often feel intentionally complicated. With terms like interest rate vs comparison rate, how do you know what actually matters when it comes to finding the right personal or home loan for you? 

One of the most confusing parts of this process, in particular, is the comparison rate. The comparison rate is a way to indicate the “true cost” of a loan, but what does that mean in practice? In this guide, we’ll break down everything you need to know about loan comparison rates so you can choose the best loan for your financial situation. 

What Is a Comparison Rate?

First, let’s define what a comparison rate is exactly. As mentioned above, a comparison rate shows the “true cost” of a loan. In other words, it’s designed to help you understand the total cost of the loan. 

The total cost of the loan isn’t based on any one factor. It uses a number of things to define a single rate, helping clarify the real cost in a simpler way. The comparison rate accounts for factors like:

  • Total amount of the loan
  • Term of the loan
  • Repayment frequency (weekly, monthly, etc.)
  • Interest rate
  • Fees and other charges

When you see how many factors are included in the comparison rate, it’s easy to see why this is an important part of the process. Each of the above is only one side of the story. The comparison rate offers a single, comprehensive number to use when considering which personal loan is best for you. 

Comparison rates are mandatory by law. They’re a way to keep lenders from advertising incredibly low interest rates that lead unsuspecting borrowers into loans that, in reality, cost much more. Similar to a payday loan, super low intro rates can be misleading for those thinking they’re getting a bargain. 

What About the Advertised Interest Rate?

A common question when looking at comparison rates is why it’s more effective to use this than the interest rate. In simple terms, the lowest interest rate isn’t necessarily the most low-cost option. If the interest rate is low but the fees and charges are high, another choice might be better. 

In addition, a lot of loans offer a lower introductory rate then revert to a different rate after a set period of time. A comparison rate accounts for this, helping you make the most of your decision process. By law, lenders are required to show you the comparison rate. This is an important guide through the loan process. 

What Doesn’t the Loan Comparison Rate Include?

You can think of the comparison rate as a guide. It only is helpful when comparing similar loans. In addition, it doesn’t include every possible factor in its rate. Things like break fees for fixed-rate loans, late fees, or redraw fees are not included. In addition, charges that vary between territories (like the government stamp duty) are not part of this. 

It’s important to always look at the full picture when considering a loan. You need to know what you’re getting yourself into, and whether this is a debt you can afford to pay back on time. This is why it’s helpful to work with a skilled financial professional who can guide you to the right loans for your situation. While the comparison rate is a great guide, it shouldn’t be the only factor you consider. 

How Do You Find Comparison Rates?

If you’ve decided a loan is right for you, how do you begin looking at comparison rates? If you work directly with a financial professional, they can help you identify comparison rates for loans that fit your needs. However, you can also do this on your own. 

You can use any online loan comparison tool to see comparison rates. This should be listed along with the advertised interest rate. In addition, if you’re looking at loan rates from lenders directly, they’re legally required to list their comparison rates with their interest rates. You’ll likely see it written along these lines: Variable interest rate 3.92%, comparison rate 4.10%, based on a loan of $200,000 over 25 years. 

You can also find the comparison rate on the key facts sheet for any specific loan. This is required to be listed here with the interest rate and the total amount paid over the life of the loan. 

Tips for Using the Comparison Rate

How do you actually use the comparison rate, paired with other factors, to make a smart decision about your next loan? Other than working with a professional, there are a few things to keep in mind when shopping around for a loan. 

Get the shortest loan term you can afford

First and foremost, it pays to get a shorter loan term. This is because the longer you pay, the more interest will add up over time. If you can pay higher each month over a shorter period of time, you’ll save big out of pocket in the long run. 

Look for lower interest rates

It’s a balancing act between the comparison and the interest rates. Even a 0.5% lower interest rate could save you thousands over time. To do this, look into fixed vs. variable interest rates as well as partially-fixed rates. 

Beware intro periods that look too good to be true! This is when the comparison fee comes in handy. If the interest rate is significantly different than the comparison rate, that’s a good sign that there are either a lot of fees or the rate jumps considerably after the intro period ends. 

Always shop around

The comparison rate exists for a reason, so take advantage of it. Always compare loans from multiple lenders before making a decision. You’ll want to keep everything in mind when making your decision and don’t be afraid to check multiple sources. 

While using a comparison website is an easy way to check multiple lenders at once, be cautious. These websites exist to make money, so they likely get a financial incentive for every click they send their way. While they can still be a source of valuable information, remember they also include many advertisements. 

Use a loan calculator

It’s not always easy to understand how much your new loan will really cost until you’re actually making payments. Using a personal loan or mortgage calculator helps you see, in clear terms, just how much your repayment will be and for how long. 

Don’t be afraid to use the loan calculator to check multiple types of loans. This is what these tools are there for! You want to know exactly what you’re getting into before you sign on the dotted line. 

A Word of Caution About Choosing a Loan

There is no one-size-fits-all when it comes to making big financial decisions. Choosing to take on a loan is no small task, no matter what your credit rating is. As we mentioned before, the comparison rate does not include things like government charges, fees, or even cost-saving options that might be available. It gives one side of the story, but it’s not a completely clear picture. 

Comparison rates exist to help you identify the true cost of a loan. It’s a great way to compare loans between financial institutions, but it’s not a perfect formula. Again, it doesn’t fit everyone. 

This is why it’s essential to not only review your personal financial situation and know your long-term goals but also to work with a specialist. While you can begin the preliminary research yourself, having a trusted expert you can count on makes all the difference. 

All too many Aussies get themselves into loans they can’t afford, and this could lead to a financial spiral. On the other hand, the right loan makes all the difference. The next time you’re browsing loan comparison websites, make sure you’re looking at the big picture. This means taking every factor into account for yourself, loan comparison rates and more. 

Use Comparison Rates with Confidence

Now that you know the ins and outs of loan comparison rates, you’re ready to start shopping around for your next loan. Whether you’re looking to buy a house or get a personal loan, understanding these key terms makes the process run much more smoothly. 

Are you ready to start the loan process? If so, talk to the experts. Debt Busters has over 15 years of experience helping Aussies make the right financial decisions for their future. We can help with every aspect of the loan process to make navigating different rates a breeze. Contact us today on 1300 368 322 to talk to a member of our team about the best types of loans for your situation. We’re here to help every step of the way. 

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