Comparison rates for fixed term credit – what is it and 12 other FAQs
One question we hear a lot at Zenith is, “What’s a comparison rate?” so I thought this could be a good opportunity for a blog post that answers some of the most baffling headscratchers on the subject. So let’s start at the beginning…
A comparion rate is something you’ll see when credit providers advertise fixed term credit (mainly used for personal domestic or household loans). The Consumer Credit Code requires them to provide a rate that includes:
- the interest rate
- fees and charges.
For example, if a bank advertises an interest rate of 5.49%, its comparison rate might be 6.75%.
However, there are other important things you need to know. So here are 12 popular questions about comparison rates that we’re often asked by clients looking into fixed term credit.
Comparison rates: Frequently asked questions
1. Do comparison rates include all my fees and charges?
Comparison rates are useful for comparing rates between different loans. However, they don’t include all fees and charges or take into account a loan’s features. For example, the comparison rate does not include:
- government fees and charges
- fees only charged in certain circumstances eg if you pay off the loan early
- factors that make the loan more attractive, such as access to fee free accounts or flexible repayments arrangements.
2. Why don’t comparison rates have to be provided for continuing credit products?
The comparison rate formula requires the amount and term of a loan to be known. However, in the case of continuing credit products, such as credit cards, neither the amount nor the term of the loan is known in advance.
3. What does the warning accompanying a comparison rate mean?
The warning advises consumers that the comparison rate is accurate only for the particular loan amount and term on which it is based. Different amounts and terms will produce different comparison rates.
The warning also advises consumers of the limitations of comparison rates, by noting that they may not provide a complete picture of the total cost of a loan because, as mentioned above, they:
- don’t include government fees and charges, or fees and charges only charged in certain circumstances,
- don’t take into account some factors which may make a loan more attractive, such as fee free banking, or flexible repayment arrangements.
4. Are credit application and establishment fees included in the rate calculation?
Yes. The comparison rate formula includes credit fees and charges that are payable before credit is provided even if the credit is not provided.
5. What if the amount or term of my loan isn’t listed in the rate schedule?
The amounts and terms shown on a comparison rate schedule don’t represent all the possible combinations of amounts and terms.
This means the amount and term of your particular loan may not be included in the comparison rate schedule. To get an idea of the comparison rate that applies to your loan, look at the most similar comparison rate.
6. If I don’t keep a loan for the full term, will it make a difference to the comparison rate?
No. The comparison rate must be calculated in accordance with a standard formula, which takes into account the term of the loan as stated in the credit contract. The contractual term is always used in the calculation of the comparison rate, whether or not you intend to keep the loan for that term.
7. Does the comparison rate differ for interest only and principal and interest loans of the same amounts and terms?
The comparison rate will usually be slightly higher for an interest only loan than for an equivalent principal and interest loan, because slightly more interest is paid on an interest only loan.
8. Are home loans that feature a line of credit covered by the comparison rate requirements?
The home loan is a fixed term credit product, so it’s covered by the comparison rate requirements. However, line of credit is an extra feature and a continuing credit product so it’s not covered. This means that the comparison rate for a home loan with a line of credit only applies to the fixed term home loan.
9. If a credit application is made over the telephone, must a comparison rate be provided?
No, a comparison rate doesn’t have to be provided if a credit application is made over the phone.
10. Are ads that say a loan is interest free required to contain a comparison rate?
No. These advertisements don’t feature an interest rate so they don’t have to provide a comparison rate.
11. Do ads stating how much you’ll save on a loan need to contain a comparison rate?
Not unless they also contain an interest rate. Comparison rates only have to be provided in advertisements which feature an interest rate.
12. Does the repayment frequency affect the comparison rate, and if so, could it be manipulated by using the repayment frequency that produces the lowest comparison rate?
Different repayment frequencies only have a very minor effect on comparison rates. For example, changing your loan repayments from fortnightly to weekly with an interest rate of between 6% and 10% will usually reduce the comparison rate by about 0.01%.
The formula requires the rate to be calculated on the basis of the repayment frequency of the credit contract. Most credit providers have a standard contract for their credit products that stipulates a certain repayment frequency.
If you need any further help with comparison rates on fixed term credit, we’re here to help