As you compare car loans, you’ll notice that there are two rates attached to each loan, namely the advertised rate and the comparison rate. While both of these rates are important, the comparison rate will likely be of most use to you as you start your search for the best car loan, as it will allow you to quickly compare options side-by-side, to narrow the field to a more manageable selection.
So then, what’s the difference between the two rates? The advertised rate is the rate of interest charged by the lender, which you, as the borrower will pay in return for borrowing those funds. The rate applied to each loan is conveyed as a percentage, and will typically depend on a number of factors, such as:
- Whether the loan is secured or unsecured,
- Whether the rate is fixed or variable,
- What the borrower’s credit history is like,
- What the cash rate is, and,
- What market conditions are like.
The comparison rate, meanwhile, combines the advertised rate and any foreseeable fees and charges, such as establishment fees and any ongoing fees. By using the comparison rate to compare car loans, you can get a more comprehensive picture of what each car loan would cost over the life of the loan, taking into account not just interest, but fees as well.
Of course, there are other factors to consider, which we’ll get into shortly.
What does a comparison rate include?
The comparison rate on a car loan includes:
- The nominal interest rate,
- Upfront fees such as loan approval and establishment fees,
- All known ongoing fees, such as monthly fees.
How is the comparison rate calculated?
Car loan comparison rates are calculated based on a sample set of criteria. So, for example, each comparison rate will be based on the costs associated with taking out a five-year unsecured loan of $30,000. This essentially allows you to compare ‘apples with apples’, as you see the cost of each loan under those same conditions, side by side.
|Advertised Rate||Fees & Charges||Comparison Rate|
|Car Loan A||5%||0.5%||5.5%|
|Car Loan B||5.25%||0.1%||5.35%|
|Car Loan C||4.75%||0.8%||5.55%|
As you can see from the table, if you looked at the advertised rate only, you may choose Car Loan C because it offers the lowest advertised rate. But, when you take into account fees and charges, Car Loan C turns out to be the most expensive loan, while Car Loan B – with the highest advertised rate – is the least expensive overall.
However, it is worth bearing in mind that comparison rates are only designed as a guide to help those considering a loan to compare the options more effectively. The actual comparison rate on your loan may be different depending on your specific circumstances.
What’s not included in the comparison rate?
In order to understand the true potential cost of your car loan, it’s worth finding out what’s not included in the comparison rate you are using. Costs generally excluded from comparison rates are:
- Fees and charges that are ‘event-based’, for example early repayment fees.
- Government and statutory fees (as these are standard regardless of lender or loan type).
How should you use comparison rates to compare car loans?
As long as you understand comparison rates are provided as a guide only, they can be an incredibly useful tool in your car loan search. As you compare the options, look at the comparison rate on each loan. Look at each comparison rate side by side, to narrow your search down to the few that will best work for you.
You can then check out your short list in more detail to find out what else each loan has to offer, such as whether it allows for extra repayments or early payout with no penalty.
At the bottom of the page – or somewhere on the site – there should be info provided on how the comparison rate is calculated. While it’s not essential you find out this information, it can provide a guide as to the criteria used to determine the comparison rates you are comparing.
When should you look beyond comparison rates?
As we mentioned earlier, while the comparison rate can help you compare one car loan against another on a cost basis, it won’t be the rate you pay as a borrower. The rate you pay will be determined by factors such as how much you borrow, the length of the loan, and how good your credit is.
Flexibility is another important factor to take into consideration. Simply comparing the cost of each option won’t lead you to the loan that’s right for you. Perhaps you want to make extra repayments throughout the life of the loan – or you know you will pay it off early. If you simply choose the cheapest loan regardless of those factors, you may end up paying more in the long run.
Comparison Rate Takeaway
When you compare car loans, checking out comparison rates can be a great starting point. Knowing the comparison rate lets you compare the basic overall cost of each loan, making side-by-side comparison quicker and easier.
From there though, it’s a good idea to dig deeper to look at the value of the loan to you, and what features it offers. Once you find the loan you like, you may be able to request an estimate from the lender on the interest you will pay, allowing you to see the true cost of the loan for you.