If you’ve been researching personal loans, you may have encountered both an interest rate and a comparison rate. While many customers looking for a personal loan will be familiar with an interest rate, a comparison rate is not as well known. However, it can provide you with key information about your loan options. What does comparison rate mean, and how can it help you find the best loan option? Let’s find out.
What does a comparison rate mean for my loan?
The Australian government created comparison rates to encourage transparency for those considering borrowing money in Australia. The comparison rate provides a more accurate picture of the true cost of a loan.
A comparison rate incorporates all the different factors that affect the final repayment sum rather than just the interest it will gather over time (which is what an interest rate shows).
The comparison rate for personal loans is particularly useful because these loans often come with various fee structures that can significantly impact the overall cost. For instance, a personal loan with a low interest rate might seem attractive at first glance, but if it comes with high upfront fees or ongoing charges, its comparison rate could be much higher than a loan with a slightly higher interest rate but lower fees. This allows borrowers to make a more informed decision by comparing apples with apples across different lenders and loan products. With Handy Finance, you will only have to pay a single establishment fee and won’t be subject to ongoing or early repayment fees.
However, it’s important to remember that while the comparison rate is a helpful guide, it may not reflect your exact borrowing situation. The actual cost of your personal loan can vary depending on factors such as the loan amount, term and your credit score. Therefore, while the comparison rate is an excellent starting point for evaluating personal loans, it’s advisable to also consider other factors such as loan flexibility, repayment options, and customer service when making your final decision.
How do you calculate a comparison rate?
The comparison rate is calculated by taking the interest rate and adding the cost of the associated fees and charges over the loan term, expressed as a percentage of the loan amount. This gives you the true annual cost of the loan and provides a more transparent view than just looking at the advertised interest rate alone.
At Handy Finance, we offer a comparison rate and interest rate for all our personal loans. We pride ourselves on offering fair and flexible finance with minimal fees. If you take out a loan with us, you will only need to pay an establishment fee. There are no other fees to worry about, including any early repayment fees.
Upfront fees can included
- Application fee
- Pre-approval fee
- Establishment fee
- Valuation fee
- Legal fee
Ongoing fees can include:
- Monthly account fee
- Annual fee
- Admin fee
Discharge fees can include:
- Discharge fee
- Early repayment fee
Taking these fees into account, the comparison rate can help you determine whether the loan you are considering is good value for money.
Interest rates vs Comparison rates: what’s the difference?
An interest rate is applied to any loan product. It is a percentage charged by a lender for borrowing money, and it is calculated annually. The amount of interest is added to your principal loan amount (the amount you applied to borrow), and the total is what you will need to pay in instalments over the term of the loan.
The comparison rate takes this into account and also incorporates the regular fees and charges that will apply over the lifetime of the loan. This is why it is a rate that gives a clearer picture of what you will repay.
Many lenders may offer the same interest rate – and at face value, they could seem like equally viable options. But when you compare the comparison rate, you may note that one is significantly higher than the other. This will be because that lender will charge more regular fees over the lifetime of the loan. This is why the comparison rate is useful, as it gives a more accurate estimation of the out-of-pocket cost.
Limitations of Comparison Rates
Comparison rates don’t cover all costs involved with taking out a loan. They don’t include fees associated with optional features, any government charges or fees, late payment fees, or any insurance that might be advised.
When you’re comparing online loans, you should also consider the minimum and maximum amounts you can borrow, the loan terms on offer and whether the loan is secured or unsecured.
Comparison rates: how they can help you choose the right loan for you
The comparison rate is a valuable tool for borrowers looking to understand the true cost of a loan. By including all the additional fees and charges associated with borrowing, the comparison rate provides a more accurate representation of the total cost of borrowing. This allows borrowers to compare different loan options on an equal basis and make a more informed decision. So, whether you’re considering a personal loan or any other type of loan, be sure to take the comparison rate into account when evaluating your options.
Explore flexible financing options with Handy Finance
At Handy Finance we have a range of low interest rate loan options available for all of the big expenses in life. Whether you’re looking to consolidate debt, cover the cost of home renovations, invest in green technologies or purchase a new car, we have a loan for you. We offer loans between $2,001 and $75,000, to be repaid over terms of one to seven years – the choice is yours. Your repayments – whether you choose to make them monthly, fortnightly or weekly – will remain the same over the lifetime of your loan as we only offer fixed interest rates. Apply online and receive an indicative result within minutes.
