Written by , updated on June 30th, 2023
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Make a better, clearer, and more informed decision about car loan interest rates by learning about comparison rates.
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A car loan comparison rate is the interest rate of a car loan plus most fees and charges such as account keeping or administration fees, rolled up into one figure and expressed as a percentage per annum (per year). The comparison rate gives a would-be borrower a clearer understanding of how much their loan will cost instead of the base interest rate. The bare interest rate is often used in marketing as it’s usually far lower than the comparison rate on offer. Some lenders and banks advertise interest rates this way to attract customers. Since the comparison rate also includes most fees and charges, this allows you to calculate your budget and get a better estimate of how much you can expect to pay each month in repayments.
A comparison rate gives you a standard formula so you can compare two (or more) loans side by side and get a complete picture of the cost of a loan. When you have a comparison rate, loan term, and amount you want to borrow, you can calculate your repayments using a car loan calculator. This will give you approximate repayment figures, so you know whether your loan is within your budget.
Let’s look at a $20,000 car loan with a five-year term. Here are two examples with differing rates.
| Car Loan | Interest Rate | Fees | Comparison Rate | Monthly Repayment |
|---|---|---|---|---|
|
Package A |
7.45% p.a. |
0.5% p.a. |
7.95% p.a. |
$405.05 |
|
Package B |
6.95% p.a. |
1.75% p.a. |
8.7% p.a. |
$412.26 |
Though Package A has a higher base interest rate, it is more competitive when fees are added in as a comparison rate. All rates and figures here are estimates.
Remember, some car loan comparison rates may be for different loan terms, amounts, and include facilities such as balloon payments. Make sure you are comparing loans that have the same terms and amounts to get a clearer picture of how much you’ll be spending.
A comparison rate empowers a consumer or would-be buyer of a car who is looking for car finance to get a complete picture of how much the loan will cost over the loan term. A comparison rate is made up of three ongoing costs:
This is all “rolled up” into one rate, known as the comparison rate. This allows a car loan applicant to compare rates “like for like” instead of guessing the real cost in fees and other charges.
The comparison rate that will determine how much you pay back in interest and fees depends on how much you intend to borrow, the term of the loan, how often you repay the loan (repayment frequency), and the three items above: interest rate, upfront fees, and ongoing charges.
A lender’s comparison rates can also be represented in a comparison rate table or schedule. This schedule details the various rates that apply to the lender’s products for different terms and loan amounts. You can then directly compare these rates to another lender’s rate schedule to determine which rate better suits your situation.
Comparison rates may not show you how much features of your car loan will cost. This is because many of these features are optional or transactional costs that only apply if you use them. Fees that are used to maintain the loan (administration fees, for example) are counted toward the comparison rate.
For example, some lenders may charge a fee on extra repayments. Others might not. A lender that allows extra repayments may want to charge a fee on paper statements, which is not part of the overall ongoing cost of the loan.
Anything that does not affect the ongoing, “predictable” part of your loan could be considered part of the comparison rate. You’ll have to talk to your lender or broker to ensure what fees are considered transactional and what fees are part and parcel of the overall loan package.
When taking comparison rate car loan products into consideration, you should keep these options in mind. Otherwise you might find nasty surprises trying to access such options.
Car loans are flexible in that a borrower could choose (depending on their circumstances) a secured or unsecured loan, or fixed or variable interest rates.
A secured car loan is usually cheaper than a comparable unsecured car loan, as the car is used as collateral. Comparing a secured car loan and unsecured car loan, even with a comparison rate, is not an equal match-up.
Comparison rates are better suited to fixed car loans, which most car loan products are. A fixed car loan sets the rate from the beginning and lasts until the end of the loan. A variable car loan rate, even expressed as a comparison rate, is harder to compare like for like. A variable rate may go up and down depending on the market. Some lenders may pass on interest rate cuts; others may not. This makes comparing one variable comparison rate against another troublesome: be wary when looking at variable car loan rates when working out your budget.
Some car loans come with options to reduce regular repayments through reserving a portion of the sum to the end. This is called a balloon payment. A balloon payment or residual value payment is a fraction of the total borrowed, usually between 20% and 50% payable at the end of the loan term. If you borrow $20,000 for a car and opt for a 30% balloon payment, you must pay $6,000 at the end of the loan. This is, in effect, the last instalment to close out the loan.
The comparison rate is not affected by this, as it’s an ongoing cost. You will have to come up with the lump sum at the end of the loan. If you need to finance this with another loan, you may end up paying more in interest.
The same may not apply to a loan with a redraw facility. This allows you to take out money already paid into your loan, like home loan equity (though not the same, as cars depreciate.) These are transactional fees and are usually not included in the comparison rate. Redraw facilities may even extend your loan or how much you pay each instalment, so be careful before considering a redraw facility.
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