What will your loan really cost you?

Comparison rates take the hard work out of comparing the cost of different loans, but they are not the only thing to consider when you're shopping around for a loan. Here we explain what comparison rates are, how to use them, and other things to consider when you are looking for a loan.

What’s a comparison rate?

A comparison rate is a rate that helps you work out the true cost of a loan. It reduces to a single percentage figure the interest rate plus most fees and charges relating to a loan. The comparison rate allows you to compare loans from different lenders to find out how much it will cost you.

Lenders use standardised assumption when calculating comparison rates for different home loan products, the loan amount is $150,000 and the term of the loan 25 years. This leads to a very flawed outcome for the borrowers, as you will see from the tabled example below, as the loan amount increases the difference between the advertised rate and the comparison rate decreases.

How to use comparison rate

Always compare interest rates, product features, and fees and charges. Even a small difference in the interest rate can potentially make a difference to your payments over time.

It is difficult to compare home loans that have different interest rates and fees. This is why credit providers must give a comparison rate when they advertise a rate or a weekly payment for home loans. The comparison rate includes the interest rate or weekly repayment amount, plus most fees and charges.

In the example above, comparison rate for home loan B with its larger loan amount will be very close to the advertised rate even thought it has the same fees as loan A.

How important are comparison rates?

Checking the comparison rate is a great way to compare the cost of different loans, but it is not the only thing to consider when you are deciding which loan is right for you. As well as the comparison rate, it is important to think about what features each loan offers, and how

important these are to you. For example, if you are in the market for a home loan, you might want one that has a redraw facility, a linked 100% offset account, or the ability to make extra repayments.

At loansHub, we’re always available to guide you through any questions or concerns you may have regarding rates and how to take control of your mortgage finance.