What is a comparison rate?
A comparison rate is what is required under current credit legislation to be 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, if any. A comparison rate is only ever used for advertising purposes.
A comparison rate is the rate taken into consideration including all fees and charges, which will use the borrowed amount, excluding borrowing fees as the amount to determine the comparison rate, whereas an interest rate will calculate your repayments from the borrowed amount including the fees.
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.
The calculation of your repayments under a finance contract would be your purchase price, minus any deposit or trade in, plus any finance payout, giving you your changeover figure. Then borrowing fees and charges are added to your changeover figure and this figure is used to calculate your repayments on the ‘interest rate’ written over the duration of the loan period. If there is any monthly account keeping fees, this would now be added to the repayment, giving you your final repayment.
The calculation for a comparison rate would be the final repayment as per finance contract and what rate would need to be ascertained to establish this repayment on the initial changeover figure. Please see the below table for an example.
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