The concept of the comparison rate was introduced to help consumers make cost comparisons when obtaining personal credit so that more informed decisions can be made on which loan best meets with their needs.
Basically, the comparison rate takes into account all the costs associated with a loan into a single rate of interest over the term of the loan. Costs include:
- Monthly account keeping
- Establishment fees
- Annual management fees
The Consumer Credit Code regulates the way the comparison rate is calculated. A formula has been devised that must be used by all banks and other lenders.
What types of loans are affected?
Typically the types of loans that must be expressed with a comparison rate are home loans and personal loans. However, under the provision of the code credit cards and lines of credit products are not required to provide the comparison rate.
Banks and other lenders usually advertise the applicable interest rate for a particular product with the comparison rate next to it. The comparison rate usually will be higher due to the fees that have been taken into account as discussed above.
Always ask your prospective bank to disclose the comparison rate.
Usually banks and other lenders will provide you with a comparison rate based on a specific loan amount over a typical term of 25 years. However, you must be aware that different loan amounts with different terms will result in different comparison rates.
The code provides a warning statement that all lenders must disclose as a written disclaimer in every stationery item they produce or advertising campaigns they undertake. The warning statement is as follows:
"This comparison rate applies only to the example or examples given. Different amounts and terms will result in different comparison rates. Costs such as redraw fees or early repayment fees, and cost savings such as fee waivers, are not included in the comparison rate but may influence the cost of the loan".
The comparison rate concept makes it compulsory for banks and other lenders to provide more transparency of fees and charges.