What is a comparison rate?

When researching credit in Australia, loan interest rates will always be shown alongside a comparison rate. But what is a comparison rate, and what does it mean when getting a loan?

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A personal loan or home loan is a big commitment. To ensure you are getting the best deal it is important to understand what different interest rates mean and get a handle on some common banking jargon.

Interest rates determine the cost of your home or personal loan and what you pay each month. However many people do not understand the importance of looking at the comparison rate when researching the cost of a home loan or personal loan.

The Australian Securities & Investment Commission (ASIC) knows it is difficult to compare home loans that have different interest rates and fees. This is why as part of the National Credit Code, all credit providers must give a comparison rate when they advertise a rate or a weekly payment for home or personal loans. 

What is a comparison rate?

The comparison rate includes the interest rate, repayment amount, as well as certain fees and charges relating to your loan. A comparison rate can help you understand the true cost of your loan and compare loans with different financial service providers.  The comparison rate only allows comparison based on cost, and will not include other factors that may make your loan more attractive, such as access to fee-free accounts or flexible repayment arrangements.

Let's say you are comparing two home loans with different financial institutions and both interest rates are the same. This does not mean the costs of the loan are the same. There may be additional fees and charges impacting the overall cost of the loan. Instead, look at both comparison rates. Are they different? Even the smallest difference in an interest rate or fees can make a big difference to your loan repayments. 

Remember: A comparison rate should be used as a guide only, to compare ‘like for like’ products. This is why comparison rates will always be advertised alongside a comparison rate warning to explain how the figure is calculated. Before committing to a loan, check upfront with your lender and read the applicable loan documentation to confirm whether the terms of the loan meet your needs and budget.

We're here to help. If you'd like to talk to Heritage about interest rates, contact us 24/7 on 13 14 22 or drop into your local Heritage Bank branch.

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