Thread: Comparison Rate????

This was introduced some time in the early 2000s. I think it was a government
initiative.

From what I understand factors such as fees and charges, interest rate, length
of time for loan and frequency of payments are all taken into account to bring
every loan to the same base.

Obviously one would think that the lower the comparison rate then the better
the loan for the consumer.

You might get a better explanation elsewhere. Try Google.

I read a rather long article about "comparison rate" on Wikipedia and was none the wiser and even more confused. Does a "comparison rate" of, say, 2.9% PA mean that the interest rate is 2.9% or not? If not what is it?

Gruñón

Art is pretty much on the money. If the rate is 2.9% but there is a $100 per year fee, or a $12 per month fee then the effective rate will always be higher. How much higher depends on the amount of the loan.

If there are no fees and charges (or you manage not to incur any) then the rate is the rate.

Very confusing . Just tell me what the interest rate is and what the charges are and I'll work out what it's costing me.

Originally Posted by Grumpy John

Very confusing . Just tell me what the interest rate is and what the charges are and I'll work out what it's costing me.

Isn't that just what the comparison rate is doing. It adds all the costs together for the life of the loan and recalculates the rate for you. So a 2.8 comparison rate is a cheaper overall rate than a 2.9 comparison rate

Originally Posted by Grumpy John

Very confusing . Just tell me what the interest rate is and what the charges are and I'll work out what it's costing me.

That's why they do it.......all part and parcel of why they are currently being exposed in the Federal Court for dreaming up new and overblown fees to add to their profits. There are actual memos being produced in the evidence where they (the Bank Board members) are talking about how much the fees add to their profits......

Example:
If the loan is $10,000
and the interest rate is 2.9%
and there and no fees
then you'll pay a total of $290 per year in total rates and fees
so the rate is 2.9%

but if there is a $100 per year fee/charge as well
then you'll pay $390 per year in total rates and fees
so the effective (or comparison) rate is 3.9%

if the fee was $12/month
then you'll pay $434 per year in total rates and fees
so the effective (or comparison) rate is 4.34%

Then, if you change thatloan to $100,000 that changes things to look more attractive because the $100 pa fee is a much smaller percentage of the loan (coz the loan is much larger)
and the effective rate would then be
($2900 + $100 = $3000)....3%

You could always emigrate back to the Old Country. Unlike here, the banks do as they please.

Here is another explanation, much as above, but it also discusses some of the disadvantages of comparison rates.

Comparison Rate | Real Interest Rate or AAPR Average Annual Percentage Rate

Okay, starting to make sense now. Is it only the car companies that have to give a comparison rate?

Originally Posted by Grumpy John

Okay, starting to make sense now. Is it only the car companies that have to give a comparison rate?

Anyone who lends money. It is required by Law.

Originally Posted by Big Shed

Here is another explanation, much as above, but it also discusses some of the disadvantages of comparison rates.

Good link but the "disadvantages" listed relate to costs/conditions associated with many loan contracts and not exclusive to comparison rates.