When you're in the market for a new home or car, the first thing you probably look at is the interest rate. It makes sense; a lower rate means lower repayments, right? Not necessarily.
While the interest rate is a crucial part of the equation, the Comparison Rate is the number that actually determines how much money leaves your bank account. In this guide, we’ll break down why the "sticker price" isn't always the "final price."
The interest rate is the percentage of the principal loan amount that the lender charges you to borrow the money. It’s the most advertised number because, frankly, it’s the one that looks the best on a billboard.
However, the interest rate doesn't include the "extra" costs of the loan, such as:
The comparison rate was introduced to protect consumers from "hidden" costs. It is a formula that combines the interest rate and most mandatory fees into a single percentage.
Essentially, it tells you the true cost of the loan.
If you see an interest rate of 5.50% but a comparison rate of 7.20%, that "gap" represents the fees. The wider the gap, the more expensive the loan is to maintain.
When comparing two lenders, you might find:
Even though Lender B has a lower interest rate, Lender A is actually the cheaper loan over time because the fees are lower.
While the comparison rate is much more accurate than the interest rate, it doesn't include everything. "Event-based" fees are usually left out, such as:
Read our guide on 5 Hidden Fees to Watch Out For in Car Finance.
Next time you’re comparing finance options, don't let the headline rate distract you. Focus on the comparison rate to ensure you're getting a fair deal.
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