What is a car loan comparison rate?
There can be numerous rates involved with a car loan, and it’s important to know what each of them cover, to ensure you can get the best possible deal on your car loan.
Car loan rates can vary depending on your personal circumstances and include numerous different costs. An important rate to be aware of and understand how it relates to a car loan, is the comparison rate.
Car loan comparison rate
While you may think that choosing a personal loan with the lowest interest rate is the best option, this is not always the case. With any lender, there are associated fees and charges that can impact the total amount you end up paying over the period of your loan.
A car loan comparison rate is an indicative interest rate that combines the base interest rate with any foreseeable fees and charges associated with the loan into one figure. This generally includes upfront fees, including approval and establishment fees, and known ongoing fees, such as accounting fees.
The comparison rate gives borrowers a more comprehensive idea of how much the loan will cost over the loan period, as opposed to just the base interest rate. The base interest is often used in marketing to attract borrowers, as it can be a lower figure than the comparison rate, whereas a comparison rate can provide a better overview of the totals costs associated with your loan.
A comparison rate excludes government and statutory fees, insurance products, and fees and charges that are event based or may not apply for the duration of the loan (such as statement fees or early repayment fees).
By including most fees and charges, you can calculate your budget and get a better idea of how much you can expect to pay with your monthly repayments.
Why a comparison rate is important
When you have the comparison rate, loan term and amount you want to borrow it is easier to calculate your repayments using a car loan calculator. This can provide you with an approximate figure for repayments, so you know if it is within your budget.
The comparison rate can take the guesswork out of understanding the real costs involved with a car loan loan interest rates. It will help you determine how much you pay back in interest and fees, depending on how much you intend to borrow, loan term, repayment frequency, and interest rate, upfront fees and ongoing charges.
Unlike an interest rate, which is shown on a finance contract and the rate that your repayments will be calculated for, a comparison rate is generally used only for advertising purposes.
A comparison rate is the interest rate plus all fees and charges that an applicant would have to pay if they successfully gain a loan. The comparison rates makes it easier for the borrower to compare offerings by lenders.
Comparing car loan rates with the comparison rate
When comparing car loan rates, the comparison rate is an important figure to be aware of.
A lender will often show comparison rates in a comparison rate table or schedule detailing the various rates that apply. This allows you to easily compare these rates to another lender’s to find the best rate for you.
A comparison rate provides a standard formula to compare loans against each other, however, some car loan comparison rates may be for different loan terms, amounts, and include facilities such as balloon payments.
Types of car loans can vary, from secured to unsecured loans, or fixed to variable interest rates. When comparing, make sure to compare against the same type of car loan, with similar terms, to get a more accurate comparison.
While fees that are used to maintain the loan are counted toward the comparison rate, comparison rates may not show how much the features of your car loan will cost. This is because many features will be optional or transactional costs that only apply if you use them.
The features of a loan could include redraw and direct debit facilities, loan portability and repayment options (including the ability to make early or additional repayments). These can increase the flexibility of your loan and make a difference in the overall cost. It may depend on the loan terms, as to what features are included and what are additional costs.
The comparison rate can help you more accurately compare one loan against another on the basis of its true cost, but if you’re unsure what is included, ask the lender. For more information on getting the best car loan rates, and comparison rates, contact 360 Finance Specialists.