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Understanding the Difference Between Interest Rate and Comparison Rate
Have you recently looked at applying for a loan and noticed that two different rates are listed? Are you asking yourself what is a comparison rate? When applying for a loan, customers are presented with the interest rate and the comparison rate, with both listing different amounts. Each has their own distinct functions, and it is important to be aware of what each rate represents and how that will affect your asset finance.
This blog entry will discuss the difference between interest rate and comparison rate while also providing definitions for both. Being a finance broker, FinanceBeagle is here to assist you with any queries you may have regarding the loan process and the fees that follow.
Give us a call on 1300 225 525 so we can answer any questions you may have. We also have an online contact form and you are also able to request a quote through our website. Lets make life simpler, together.
What is an Interest Rate?
An interest rate is the amount of money that you owe your lender for borrowing money from them. It is always presented as a percentage of your loan and is provided to you ahead of time. For example, if your loan is $100,000 and the interest rate is 2.5%, that means you will be charged around $2,500 for the first year of your loan. This interest rate will change depending on the size of your loan and the lender you go with. The key difference between interest rate and comparison rate is that the interest rate does not factor in all the extra costs that come with having a loan. These may include:
- Monthly account keeping fees
- Application or lender fees
- Loan setup or origination fees
As an interest rate will not include these fees in their rates, they have the potential to catch clients off-guard as they find themselves paying more than they expected.
What is a Comparison Rate?
If you have found yourself asking what does comparison rate mean, the key difference between interest rate and comparison rate is that the comparison rate represents both the interest rate as well as any extra fees and charges. This way it presents a more accurate picture of the amount you will be paying for your loan, so you are not surprised by any hidden fees or extras. In fact, comparison rates were made mandatory for this reason, as some lenders would present lower than market interest rates only to trick clients into paying more via hidden account keeping fees. The factors that are calculated to create the comparison rate are:
- Interest rate
- Fees and charges
- Loan term
- Loan amount
- Payment frequency
Which Rate Should I Pay Attention to?
While the comparison rate that a lender presents will not always be entirely accurate, the rate you pay will most likely align closer to that number than the agreed interest rate. That is why it is important to use the comparison rate as your main guide when comparing different loans. The comparison rate can be misleading however, as it traditionally uses an outdated formula to calculate its rates, meaning it may not be accurate for your exact loan. Thus, it is recommended for you to calculate your own comparison rate, to create a more accurate picture of the rate you will be paying for each lender you are looking at. The factors to consider in your calculations include:
- Loan amount
- Loan term
- Repayment frequency
- Interest rate
- Any fees that are relevant to the loan (monthly/annual fees, establishment fees, settlement fee etc)
Comparing Payments is Key – Let Us Help!
At FinanceBeagle we always recommend that our customers, when comparing quotes, ensure they are focusing on comparing differing monthly payments. With the various interest and comparison rates, and fees associated with the loan, the most bullet proof way to compare the best quote is to compare the monthly payments. If you need assistance with doing the calculations or comparing the payments, our brokers are here to help!
Fetch a Great Deal with FinanceBeagle
If you have more questions regarding what does comparison rate mean, or you are searching for great personal finance deals, contact FinanceBeagle today by calling 1300 225 525. Whether it is business financing or a personal loan, you can request a quote online or use our online contact form to get in touch. Our team are the backbone of what we do, and we are ready to help.