To make finding the right loan easier, and to make advertised rates as transparent as possible, there are comparison rates. You’re looking for the best mortgage deal and you see an advertisement. ‘3.64% INTEREST!’ and, underneath that seemingly too-good-to-be-true rate, ‘4.35% comparison rate’. What does this mean?
A comparison rate is a percentage rate that all lenders are lawfully required to display alongside their advertised interest rates. It is a rate that includes all fees and charges associated with the loan. The comparison rate is intended to assist you in understanding the overall cost of the loan based on several factors other than the ‘low’ interest rate. As a result, this rate shows customers what the true cost of the loan is.
Lenders will include a statement along the lines of ‘Comparison rate calculated on a loan of $150,000 for a term of 25 years, with monthly repayments. If your loan is going to be for $900,000, the comparison rate for your loan will be vastly different.
The lowest interest rate loan is not always the most cost-effective option. Based solely on interest rates, you may believe that two loans cost the same, but the comparison rate may reveal whether one loan costs more than the other. It may also help you decide which loan is best suited to your budget and long-term financial goals.
To get an idea of the comparison rate that applies to a loan, it is a good idea for borrowers to work with a finance broker to look at the comparison rate for the amount and term closest to the amount and term of their loan.
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