Comparison rates
Tools to help you identify the true cost of credit products
A comparison rate is a tool to help consumers more accurately identify the total cost of a loan. It is a rate which includes both the interest rate and most fees and charges relating to a loan, reduced to a single percentage figure. For example, a bank’s advertised interest rate may be 5.49% and its comparison rate 6.75%. Comparison rates enable consumers to easily compare suitable credit products on offer.
Comparison Rate Calculation
Comparison rates are calculated using a standard formula that takes into account:
- the amount of the loan;
- the term of the loan;
the repayment frequency; - the interest rate; and
- most fees and charges,
but excludes:
- government charges, such as stamp duty or mortgage registration fees;
- fees and charges which you incur separately, such as fees charged by your settlement agent or solicitor; and
- fees and charges that cannot be calculated in advance because you may not incur them, such as late fees; or fees and charges that are for optional features of a loan that you may or may not use, such as redraw fees or early repayment fees.
The comparison rate is calculated for credit arrangements or loans that are fixed term (ie. which must be repaid within a specified time period), and which are primarily for personal, domestic or household purposes. Comparison rates cannot be calculated for "continuing credit" products such as credit cards since the amount and repayment term cannot be known in advance.
A warning accompanies each comparison rate advising consumers that the comparison rate in question is accurate only for the particular loan amount and term on which it is based, as different amounts and terms will produce different comparison rates. The warning is intended to make consumers aware that, while a comparison rate can be a useful tool for comparing the cost of different loans, it is important to consider all of a loan’s features and not just focus on the comparison rate.
A comparison rate must be included in any advertisement for a fixed term credit product that contains an annual interest rate.
Credit providers, finance brokers and linked suppliers, must display and have available for collection by members of the public, copies of a comparison rate schedule (a list of comparison rates for a standard range of loan amounts and terms).
For more information on comparison rates, visit the Uniform Consumer Credit Code website.