Why comparison rates can mislead you

Comparison rates often create more confusion than clarity – exactly the opposite of what the authorities wanted when they were mandated in 2003.

That is  a worry given that many borrowers rely on comparison rates and make important decisions based upon them. The original intention was praiseworthy:  Tell consumers how much a loan really costs by calculating a percentage interest rate which includes any application fees or on-going fees and charges which might be incurred.

Every lender who advertised an interest rate was required to prominently display its comparison rate.The problem is that the comparison rates are not always accurate and in some instances misleading.

One of the reasons is that with the development of new products has come a new set of fees which are not required to be included in the comparison rate – a good example is the exit fee many lenders now charge to offset lower up front fees. The same applies to rate lock fees used by borrowers to reserve fixed interest rates during a loan application period.

A second reason is that while lenders generally provide comparison rate schedules for standard loans between $50,000 and $300,000,  there is nothing to guide consumers who qualify for discount rates or “pro packs”  which might have no or limited fees  but generally include an annual fee associated with a credit card.

How do you as a consumer get an accurate picture of how much that loan is really going to cost?

One way is to ask your broker for a shortlist of likely lenders and products which might suit your situation and then ask for a detailed analysis of all the major fees and charges you will incur with each product.

Your broker at Finding Finance will provide this information to you as a matter of course along with an estimate of the likely government fees and taxes you’ll have to pay.

There is also a nifty calculator we would recommend at the Adelaide Bank website:

Adelaide Bank

It doesn’t take account of all possibilities, but it can bring clarity where there might be confusion.