Advertised vs Comparison Rates
Comparison rates make it easier to compare the cost of different loans from different lenders. This article will consider why comparison rates are useful, and what other factors you need to consider when shopping around for the best loan option. Here's what you need to know about advertised vs comparison rates.
What is a comparison rate?
A comparison rate is a single figure that aims to represent the true cost of a car loan by combining all of the different costs that apply to a loan product.
The comparison rate is calculated by combining the interest rate, fees and charges that apply to a specific loan, and converting this to a percentage rate.
What is the advertised rate?
The advertised rate is the actual interest rate that applies to your loan. It's a percentage rate. Each month this number is multiplied by your remaining loan balance and charged as 'interest' on your loan.
The advertised rate doesn't represent the total fees and charges that apply to your loan, so it only represents a part of the costs of the loan.
How do I use comparison rates?
Comparing loans by comparing their comparison rate gives you a more accurate analysis of which loan products offer better value for money than simply comparing the advertised interest rate will.
Comparison rates were designed to prevent loan providers from advertising very low-interest rates to customers, then charging higher fees to cover their costs.
When you use a loan comparison website, you'll see both the advertised rate and the comparison rate side by side. If the website also shows the upfront fee, you'll be able to see at a glance that charging a larger fee will increase the comparison rate.
Here's an example:
|Interest rate||Fees (% of loan amount)||Comparison rate|
|Car Loan A||10%||2.5%||12.5%|
|Car Loan B||12%||0.2%||12.2%|
You can see here that the lowest interest rate loan doesn't offer the best overall value this time.
Are there other ways to compare loans?
You can compare your car loan options by comparing the 'monthly repayment' for each loan. This amount will usually include any account fees and loan costs.
The Positive Lending Solutions car loan calculator will give you a monthly repayment estimate for the car loan, based on the purchase price, loan type and size of your deposit.
Comparing monthly repayments is good because you will know immediately if you can afford that amount, or if you need to make adjustments to the loan to fit it into your car loan budget.
What else do I need to consider?
Comparing loans using the comparison rate and the monthly repayment amount are both good ways to compare car loans, but there are other things you need to take into account.
Other factors that influence the total costs of a car loan include:
- Loan term
- Early payout fees
- Features and flexibility of the loan
1. Loan term: The longer the loan term, the more total interest you'll pay. While your monthly payments will be lower over a longer loan term, you make more payments, and it adds up.
2. Early payout fees: the comparison rate and monthly payment calculations don't factor in fees that only occur if certain events trigger them. This means they don't reflect any default or late payment fees. They also don't include early payout fees.
It pays to find out what these are before you sign your loan contract so that you know what you expect if your circumstances change.
3. Features and flexibility: Comparing the costs of the loan using a comparison rate or monthly payment figure doesn't tell you anything about the features of the loan.
Sometimes loan features make a huge difference to the practicality of car finance. Features that you may value, like the ability to make seasonal payments rather than monthly ones to fit with your cash flow, or no early payout penalty - may be worth more to you than a lower interest rate.
What is the best way to compare car loans?
Ultimately, the best way to compare car loans is to make a list of what you need the car loan to achieve, whether it's to buy a car for private use, or a car to be used in business.
Once you know exactly what you need the car loan for, and how you plan to repay the loan, then you can search for a car loan with the right features, and of course, the lowest interest rates and repayments.
If you need a car loan for a specific reason, a car loan adviser can guide you to narrow down the best options and negotiate the rate and features that are right for you. You can request a quick quote to get information that is specific to your financial needs.