A comparison rate is used when advertising finance rates or repayments. It is not to be confused with an interest rate, as this is the rate shown on a finance contract and that rate that your repayments will be calculated for. A comparison rate is only ever used for advertising purposes.
A comparison rate is the interest rate plus all fees and charges that an applicant would have to pay if they applied for and took out the financial product being advertised.
The comparison rate was put in place so the borrower could easily compare side by side in regards to lenders current offerings. After some time lenders were using ‘tricks’ to reduce the comparison rate, as this rate would not take into account deferred establishment fees or early penalties, so this was used to reduce the comparison rate quoted, confusing the consumer more and if they wanted to freely move after the contract was already in place, they would either be stuck with that lender for a period of time to recoup the lender losses from the reduced upfront fees, or they would be hit with hefty penalties, so the lenders could advertised a low comparison rate.
The other issue with comparison rates, is that it is only ever used in advertising and is never specific to an individual contract and is always an example given only, which is required to be explained in a ‘fine print’ disclaimer.
For financial products like car loans, where interest rates are set on a case by case basis, comparison rates are less effective advertising tools, and so are used less often. You do occasionally see comparison rates being used in 1 or 2% finance rate campaigns ran by manufacturer owned financiers. But extra care should be taken with those offers, as they may carry additional lending criteria or vehicle restrictions.
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