What is a comparative interest rate?

You may have noticed in recent times a steady rise in car advertisements pushing an ultra low interest rate, described as a Comparison Interest Rate. We have recently been asked a few times about this ‘Comparison Interest Rate’ and if it should be trusted.

Interestingly enough, this new way of describing rates will actually make it easier for consumers to compare the actual cost they will pay. The introduction of the comparison rate is to try and stamp out the ‘dodgy’ practice of using different and often confusing methods of calculating interest rates, and allocating hidden fees.

The comparison rate is calculated using a standard formula that incorporates:

– The amount of the loan

– The fees associated with loan

– The repayment frequency

– The interest rate

With each financial institution now having to follow a set formula, and standard criteria for each type of loan, be it car or housing. For car loans this should include the fees, a five year term and for a loan amount of $30,000. For home loans, it will need to include the fees, a 25 year term and a loan amount of $150,000.

As Credit Cards are not for a fixed period of time, they are not required to show a comparison interest rate.

For the most part comparison rates can be trusted, but they will not include late fees or other penalties, or any form of stamp duty.

These rates are a handy tool but will no doubt be used by institutions as a way of getting people in the door, only to then offer different terms.

If you are looking at buying a new home or vehicle, understand all of the costs and risks before making any decision. Contact your SWP adviser, as we have access to professional service providers who can obtain financing to suit your specifications.