Author: DavidBryde

Use comparison rates to check the true cost of a loan

Our Product Manager David Bryde urges consumers to use comparison rates to check the true cost of a loan when comparing financial institutions.

When you are looking for a home loan or personal loan the choice between lenders can be overwhelming.

Unfortunately many Australians are being duped into paying tens of thousands of dollars more than they think they will by taking up introductory rate loans or other low rate loans.

How can you avoid being one of these people? One tool to use is comparison rates.

Comparison rates were introduced as a tool to help consumers identify the true cost of a loan taking into account the upfront costs, ongoing fees, and other fees not commonly included in headline rates. A home loan comparison rate is typically calculated on a $150,000 loan over a 25 year loan term and takes into account the interest rate and the known fees that apply to the loan.

The Comparison Rate is sometimes called the 'real rate', 'Annual Average Percentage Rates' or 'AAPR'.

Legally, comparison rates must be displayed in conjunction with any advertised rate. The problem is that people don’t understand comparison rates and it isn’t compulsory for them to be displayed in media tables and articles provided by bodies other than the lenders themselves. The media and others using headline rates provided by web-based rate providers do not always compare apples with apples.

Just looking at the headline interest rate is fraught with danger because it may not be the ongoing rate you receive and it does not take into account up-front and ongoing fees you may be paying to get it.

Particularly with packaged loan offerings, the lowest rates often come with the highest fees.

Comparison rates also take into account the variable rate you will revert to if taking out an introductory or fixed rate loan as well as any fees that apply.

It is common for “honeymoon” loans to have a considerably higher comparison rate and for fixed rates to revert to something other than a lender’s cheapest variable rate.

Example: You see a loan advertised at 6.75% p.a. You look closer and find that the super low rate rate is only for one year. It actually reverts to an ongoing rate of 7.75% p.a. It has a $600 application fee and a monthly fee of $8.

This means your 6.75% p.a rate is effectively a 7.77% p.a rate. This means the total cost of a $150,000 loan over 25 years will be $189,232 rather than $161,369.

Unlike many of our competitors, the Greater’s comparison rates for its Greater Getaways (standard variable) Home Loan and its Great Rate (basic) Home Loan are the same as its quoted rate. That is because the Greater does not have hidden fees and charges.

While there can be factors other than rates to consider when choosing the best loan such as service and other rewards, using the comparison rate rather than an advertised rate is an excellent way to know what your loan is really costing you.

A loan with a cheap advertised rate may not be as cheap as it appears.

Questions to ask your lender:

  1. Is the advertised rate the true rate or comparison rate? If not, what is that rate?
  2. Are there fees and charges to establish the loan? Are there ongoing fees to manage the loan and for any associated savings accounts?
  3. Does the loan come with Internet/Phone banking and is that free?
  4. Can I make extra payments without penalty? Can I redraw that money if I need to and if so, at what cost?
  5. Are there exit fees if I discharge the loan early?