Home > Blog Posts > What is a Car Loan Comparison Rate?
What is a Car Loan Comparison Rate?
January 6, 2021● 4 minute read●
It’s easy to get overwhelmed when you decide to buy a car, and even easier to get swept up in the numerous do’s & dont’s you might come across during your research. Getting a car loan is serious business, and because many Aussies don’t want to risk applying more than once and damaging their credit, they’re eager to find the best rates for their score. One of the least talked about but crucial variables to consider when applying for a car loan is the comparison rate. Still, many often forget to check it or don’t know what it means and how to factor it into their budget. In this article, we’ll discuss what a car loan comparison rate is in order for you to make smarter choices.
So what is it?
Comparison rates can play an essential role in car loans, but what exactly are they? And why is it so crucial? The comparison rate is a suggestive interest rate that adds the standard interest rate with any fees of the loan and presents the percentage answer. It is a way for you to estimate the actual cost of each loan on the same scale. When you need to find the comparison rate, you need to weigh multiple variables like the principal amount you got, the loan’s term, the frequency of reimbursements, the interest rate, and reasonable charges payable to the lender.
While it is tempting to think since the comparison rate is so useful, why not use it as the only metric for evaluating car loans? But it has a pitfall. It’s still crucial you compare other metrics individually, especially those that have to do with direct access to debit facilities, your redraw options, and loan transferability.
That said, it’s essential to note that the comparison rate doesn’t include all fees. Lenders do not affect government fees, so you have to pay them regardless of what type of loan you get or who your lender is. Thus, statutory charges are exempt, as well as car insurance premium charges. Then circumstance-based fees are also not included. What do we mean by that? These are fees that you may or may not have to pay throughout the term of the loan. Good examples are an early exit fee or late repayment fee.
Why should I pay attention to it?
A comparison rate can give you an idea of how much a loan may cost you over its duration. So, in other words, it is a yardstick that allows one more accurately measure one car loan against the other. It is more reliable than any other sole metric because it has a consistent formula that considers other variables. This defined formula makes it easier for Aussies to like you to compare two separate car loans at a glance. Simultaneously, it might be hard for you to calculate the cost of two or more different vehicles because they have different metric values. The comparison rate uses its formula to level all of that, so it’s easier to compare apples and oranges.
It can also help you avoid falling into the trap of ‘special deals.’ Sometimes car dealerships like to offer borrowers that look too good to be true, such as incredibly low or even 0% interest rates. Unfortunately for the potential buyers, these dealerships manage to lure in; the deals aren’t always what they appear to be. Most of the time, they inflate the vehicle’s price and add outrageous fees that spike the car’s total cost. So the buyers can end up saving negligible amounts of money or even paying more. By using the comparison rate as a benchmark, you have protection against those kinds of scams.
How do lenders calculate the car loan comparison rate?
Any site, lender, or calculator that presents a comparison rate uses the same formula, using the nominal interest rate, up-front fees, and continuing fees to calculate the car’s real cost. Taking so many metrics into account can reveal that what you thought was the cheapest loan is more expensive in the long run.
Here’s a practical example to help you see how:
|Car Loan||Interest rate||Charges||Comparison rate|
|Car Loan A||7.25%||0.1%||7.35%|
|Car Loan B||7.0%||0.5%||7.5%|
At first glance, using only the regular rate, car loan B is the cheaper alternative. After all, it’s 0.25% lower than car loan A. But after our comparison rate added the cost of fees charged, the first choice is the better option. The first option is 0.15% cheaper than the second. Of course, to conclusively say which is better, the comparison rate assumes that they both have similar principal amounts and loan terms. Typically, the values for the calculation are $30,000 secured over five years. If either of the loans is too far from the standard formula in principal or time, the comparison rate will not be accurate. It might be helpful to know that when the principal or time is greater than the sample, the comparison rate is lower, and vice versa.
Can I use a calculator to find the comparison rate?
Most of the time, lenders display their comparison rate next to their interest rate because they are legally required to do so. However, if you would still like to compare it by yourself using a calculator, you can. A car loan comparison rate calculator works out the car’s value after you out in the right details. It’s a fast and easy way to estimate the actual value of one loan over the other. Several of them online only requires you to enter the correct information to show you the results.
Now that we’ve gotten to the end of the article, you ought to understand car loan comparison rates, how to use them, and why it’s critical to do so. As you’ve probably learned, a comparison rate is an all-in-one figure that puts you, the potential buyer, in the driver’s seat of decisions about which car loan to choose.
Written by Jacaranda Team