Finding the best car loan can be a challenge. With so many lenders out there with varying rates, it is difficult to just shop around and compare. This is where comparison rates come in handy. Although most borrowers focus on a loan's interest rate, it’s important to pay attention to the comparison rate too.
A car loan’s comparison rate gives you to true cost of your loan complete with interest rate, additional fees, and extra charges. Lenders will provide a comparison rate as a percentage. With the comparison rate, it is easy to compare loans from different lenders. You know exactly what you are getting when you know the comparison rate.
What is the comparison rate for car loans?
The comparison rate is the base interest rate plus any foreseeable additional costs. This includes charges that are associated with your car loan such as administration fees and upfront fees. The comparison rate is a more accurate representation of the actual cost of your car loan. It will give you some much-needed insight into how much you will likely spend over the lifetime of your car loan.
Lenders are required to include their comparison rates in their advertising. By knowing the comparison rate, you can make a better-informed decision and properly compare loans between multiple lenders.
Take note, comparison rates do not include stamp duty and other government fees. It also does not cover fees that were not applicable at the time. Discuss your loan with the lender beforehand to get a clear picture of how much your loan will cost.
How is a car loan’s comparison rate calculated?
The comparison rates are calculated according to the Consumer Credit Code. Australian financial institutions and lenders use the same formula across the industry so there is no need to worry about lenders having different criteria for their comparison rates.
A car loan’s comparison rate combines the interest rate and any fees applied to the loan. When calculating your comparison rate, lenders will include the following factors:
- Loan amount
- Loan term
- Repayment frequency
- Interest rates
- Upfront fees
- Ongoing fees
- Legal fees
- Valuation fees
- Settlement fees
- Admin fees
- Other fees associated with the loan
The type of rates, fees, and charges on your loan depends on the lender. You can easily compute your loan repayment using a car loan calculator when you have the interest rate, loan term, and borrowing amount.
Why is the car loan comparison rate important?
The car loan comparison rate is important because it helps you easily and quickly know what the best option is. As you can see above, there is much more to car loans than interest rates alone. You need to think about the additional fees the lender may include with the loan which they don’t always advertise.
A car loan that offers extremely low-interest rates may have a high comparison rate because of upfront and ongoing charges. Meanwhile, a car loan with a high-interest rate may have a low comparison rate because the lender has fewer extra fees.
Looking at the comparison rates of car loans from different lenders will help you see which one fits your financial situation better. Take note, comparison rates apply to loans with fixed repayment terms.
What is the difference: Interest rate vs comparison rate?
The interest rate is the amount you will be charged annually on the principal amount of your car loan. Understanding how much interest you pay on the loan can help you more accurately figure out your monthly repayments.
On the other hand, the comparison rate is a combination of your car loan’s interest rate and miscellaneous fees charged by the lender. Knowing the comparison rate helps you know the total cost of your loan. This also makes it easier to compare loans from multiple lenders.
How can you use the comparison rate to your advantage?
When shopping around for a car loan, the comparison rates can help tell you whether a loan is right for you. You can save time, money, and effort by focusing on the comparison rate. No need to scratch your head wondering what hidden fees your loan could have. Consider your current financial situation, income, debts, and the like to see what type of car loan you can afford.
As you compare different loans, make sure you are comparing similar loans. That means weighing the pros and cons of loans with the same amount and terms. You will not get any meaningful information by comparing apples to oranges. If you are looking at car loans with five-year terms, for instance, do not compare them to similar loans with only two-year terms.
If you do not want the hassle of searching through car loan after car loan—we can help! At Aussie Car Loans, we are more than happy to find the ideal car loan for you. Our brokerage service is here to aid borrowers so they can get the car they need as soon as possible.
FAQs
What is a car loan comparison rate?
A car loan comparison rate is the interest rate and all the additional fees that come with it. It gives borrowers a better idea of what the total cost of the loan is. The comparison rate also helps make it easier to compare loans from different lenders.
How does a car loan comparison rate differ from the interest rate?
The interest rate is the yearly amount a lender charges on a car loan. The comparison rate includes the interest rate as well as other ongoing and upfront fees lenders may charge for the car loan.
What factors are taken into account when calculating the car loan comparison rate?
The car loan comparison rate includes:
- Interest rate
- Annual fees (if any)
- Valuation fees (if any)
- Admin fees (if any)
- Legal fees
- Discharge fees
Some fees may be different depending on the lender.
Why is the car loan comparison rate important when shopping for car loans?
Car loan comparison rates are important because it helps borrowers easily compare loans from different lenders. Borrowers do not have to solely rely on the advertised interest rates and can make a fully informed decision before applying for a loan.
How can I use the car loan comparison rate to compare different car loan options?
Use the comparison rate while comparing similar car loans—this means similar amounts and loan terms. The comparison rate is there to guide your decision. Choosing the right car loan ultimately depends on your specific financial situation.
What are the limitations of the car loan comparison rate?
Car loan comparison rates do not include loan features that may be optional. They also do not include transactional costs and government fees. When using the car loan comparison rate while shopping around for the perfect loan, make sure to keep these exclusions in mind.
Why is the car loan comparison rate lower than the advertised interest rate?
Car loan comparison rates may be lower than the advertised interest rate because it includes other fees as well. Some lenders may charge a high interest rate but have lower additional charges that could affect the total comparison rate, and vice versa.
What is a loan interest rate and how does it differ from the comparison rate?
The loan interest rate is the amount you are charged on the balance of your car loan. The comparison rate includes the loan interest rate and other fees charged by your lender on the loan.
Can I negotiate the comparison rate with lenders?
The comparison rate is typically non-negotiable. However, you may be able to negotiate the interest rate on your car loan which can affect the total comparison rate.
How accurate is the car loan comparison rate in predicting the total cost of the loan?
The car loan comparison rate can give you a good approximation of the cost of your loan. However, it does not include government fees, optional loan features, and transactional costs. If you want a completely accurate car loan cost, it as best to discuss it with your lender.
