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Why you should look carefully at comparison interest rates

While purchasing a car is an exciting experience, arranging finance can be a real headache. The wide variety of options in the market can make the process overwhelming and comparing different options and features is confusing. Lenders are fantastic at promoting options which make their loans look appealing and affordable, such as low interest loans and fee free loans. However, the different charges and fees hidden away in the paperwork can be difficult to keep track of, and working out how much your loan will actually cost you makes you feel like you need a degree in accounting. However, there is one easy way to compare most loans – the comparison rate.

What is a comparison rate?

The name gives half the story away – it is a rate which makes it more straightforward to compare the overall cost of different loans. Simply put, it is a rate which takes the costs of a loan into account, including interest and most bank fees and charges. This requirement was introduced to prevent people being misled into taking out low interest, high fee loans. All lenders are legally required to show a comparison rate on their products. For car loans, the comparison rate is calculated based on a $30,000 loan taken over a period of 5 years (that is, the average car loan). While your loan may not be for that amount, a standard comparison is needed to clearly show the difference between each product.

As the amount of a loan increases, the comparison rate will typically change and become closer to the advertised interest rate. Conversely, smaller loans are likely to have a higher comparison rate. Why is this? Fees and charges remain constant regardless of the amount borrowed, so a $200 establishment fee, for instance, seems enormous when borrowing $5000. However, it seems much less significant when borrowing $100,000. This is yet another reason why the comparison rate is so important when choosing finance for your car.

There are some fees that are not included in comparison rates, so you do need to ensure you also consider these in your purchase. These include government charges such as stamp duty, and fees which may not necessarily be charged to you (such as redraw fees and early exit fees). However, most fees and charges that will affect you, including loan establishment fees and loan service fees, are considered when the comparison rate is calculated.

When you apply for finance, your lender is legally required to provide you with a comparison rate schedule. This document shows the comparison rates of a variety of loans for the same product, and helps you to quickly and easily compare loans. It is important to look carefully at these documents when comparing loans. Choose the best product from each lender, and then compare them to make your choice.

The comparison rate is not the be all and end all when it comes to shopping for loans. However, it is the most useful figure to use when you are trying to choose the best product for you. Remember to also take into account features that you may want or need, such as free redraw or no early exit fees, then compare loans based on the comparison rates provided. Comparison rates take the guesswork out of choosing a loan, making shopping for car finance a breeze.