Bank Interest Rates Comparison
Posted May 25th, 2010If you are looking at bank interest rates for a personal loan, an auto loan, a mortgage, or anything else that charges interest it is important to understand what banks are required to do when they list comparison interest rates.
While you shop around for the best deals you must make sure that the rates that are advertised actually reflect the amount of money one would spend on a loan.
Interest comparison rates are regulated by the government under the Consumer Credit Code Amendment Bill of 2002. This bill ensures that banks advertise fairly by including a comparison rate in any advertisement for fixed term product that has an annual percentage rate. The bill further provided that the credit issuer, broker, and supplier both display and have available to the public a comparison rate schedule. Following regulations that provide a way to calculate the comparison rates so that it is fair and truthful. This protects consumers by ensuring that they have the necessary and adequate information to make an informed choice on their loan or other financial product.
While that information is interesting it does not explain exactly what is included in a comparison rate and how it functions. A comparison rate, basically, is a way to assists consumers in figuring out the real cost of their loan. For example, a loan rate may be advertised at 5.5% but once you add in fees and charges that are related to the loan the total cost comes out to 6.76%. That is a significant difference that consumers need to be made aware of so they can properly budget for their loan payment.
Comparison rates, as stated in the regulation must be provided for fixed term credit. That means any line of credit that has to be paid back within a predetermined amount of time. This includes home loans and car loans which are typically for a set number of years. Credit cards, on the other hand are not a fixed term because you pay do not have a limited amount of time to pay them back. Lenders must also provide comparison rates for credit that is intended for personal, domestic, or household purposes.
How Is A Comparison Rate Calculated?
The government provides a standard formula that takes several factors into account including the amount and term of the loan, the repayment frequency, the interest rate and fees charged for the loan. There are certain fees which are not included in the calculation including; government charges like stamp duty or registration fees for mortgages, fees that are optional based on activities like a fee for early repayment or redraw, and those fees that are not able to be determined when the comparison rate is calculated.
What Is In A Comparison Rate Advertisement?
Each different loan has different comparison rates. In order to align all of these different loans the advertised comparison rate must be for a legislated standard that is most similar to the loan that is being advertised. These are legislated based on amounts instead of kinds of loans but the comparisons are easy to understand. There is a standard list for a five year loan of $30,000. This would be a typical term and amount for an auto loan. There is also a standard list for a 25 year $150,000 which would be comparable to a home mortgage loan.
The comparison rate schedule is a list of rates for typical loan amounts and terms for each type of product. The amounts on a standard rate schedule are set through legislation’s and there must be a comparison rate for each type of credit product. Because they use the same amounts and same loan terms the schedules can be used to compare rates for a variety of different credit applications. At all times these rate schedules must be accessible at the premises of a lender, broker, or supplier where credit items are advertised or at any place people can put in credit applications. This comparison schedule must also be included with a credit application and at online where applications for credit are made.
Tips To Understanding Comparison Rates
The comparison rate does not include all costs and should not be the only thing used to compare loans – As stated before the comparison rate does not include costs of government fees or other specific charges for extenuating circumstances. As such it might not be a complete picture of the loans cost. There are also other loan features you might consider like free banking or flexible repayments that have a value over what is included in the comparison rate. You, the borrower have to figure out what is valuable to you and consider how much those features add to a loan.
The comparison rate does not show all possible amounts or terms- Keep in mind that the amount and term of your specific loan may not be in a comparison schedule, so it may not completely reflect your costs. To find a close comparison you should look at those loans on the schedule that are close to the term and amount of your loan. Credit providers, brokers, and suppliers do not have to provide you with a comparison for your specific loan, but may do so if requested.
The advertisements may say that they are for a secured or unsecured loan – There are big differences in the comparison rates for secured and unsecured loans even if they are for the same amounts. This is because there are usually much higher interest rates charged on unsecured loans and more costly start up fees for secured loans. Be sure that your comparison reflects your loan in terms of it being secured or unsecured.
Comparison Rate FAQs
Are comparison rates provided for all continuing credit products? No, the comparison rate formula includes the term of the loan. As such, things like credit cards which have an undetermined loan amount and loan term do not have comparison rates.
Why is there a warning included in a comparison rate? A warning is included because the accuracy of a comparison rate is based on the loan amount and terms, which are actually different for most products. Therefore, if something is different in your loan the accuracy may be off slightly. It also warns customers of the limits of a comparison rate because it does not include certain fees and factors that may have a non monetary value.
Does a comparison rate include the application and start up fees for a loan? Yes, the formula include these fees and charges that are paid prior to processing an application and are charged regardless of whether or not the application was approved.
What about the fees charged by my broker, lawyer, or valuer are they included in the comparison? These fees are only included if they are paid in connection with the contract for credit. A good rule of thumb is that if you have no choice but to pay a fee and it is not a government charge nor something that can’t be determined it will be included in the comparison rate. For example a valuation fee that is required by the lender will be included but, if you enlist the services of a valuer on your own it will not be included in your credit fees and not in the comparison rate.
What if my loan amount or term is not on the rate schedule? Unfortunately, not all loan amounts and terms are listed on the schedule. If this is your situation you should find the one listed that is closest to your amount and terms to get a good idea of how much your loan will cost. Your loan provider may be willing to do a comparison for you if your make the request.
If I plan to pay off the loan early will it make a difference in the comparison rate? No, loan comparison rates are based on the facts of a credit contract and not on intentions. They also do not take into consideration early repayment fees. If you intend to pay off your loan early you will also have to take those fees into consideration when you compare bank interest rates.
Do interest only, principal and interest loans that are for the same amount and term have the same comparison rate? No, the comparison rate will be different because the interest only loan will charge a bit more interest then the principal and interest loan.
If I take out a home loan that features a line of credit will it all be part of the comparison rate? No, the home loan portion is a fixed term product while the line of credit is typically a continuing term product. Only fixed term products are included in comparison rates.
Are comparison rates required for telephone applications and interest free loans? No, neither of these instances require a comparison rate.
I’ve seen advertisements that say how much you would save with a loan, is there a comparison rate on them? No, comparison rates are only required when an interest rate is featured. If the advertisement also includes an interest rate it must have the comparison rate.
Bank interest rates can be quite confusing. Consumers must be aware of how these rates are calculated and what they mean to their particular loan. Although there are regulations in place to provide consumers with the best tools and information, advertising can be tricky. You must take the time to educate yourself about loan rates, their impact on credit card interest rates and the terms and conditions so that you get the best rates and terms on your loan.
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