Comparison Rate – What is a Comparison Rate?

The Comparison Rate is a calculation that reveals the cost of a loan, taking into account the interest rate, together with all other known upfront or ongoing fees.

Why has a Comparison Rate legislation been introduced?

To provide customers with information regarding the cost of lending, taking into consideration establishment and ongoing fees, to enable comparison of different loan types and lenders. All states and territories have introduced legislation effective 1 July 2003 making it mandatory for lenders to provide a Comparison Rate when advertising repayments and interest rates for all lending that is predominately for private purposes, with the exception of Continuing Credit facilities.

How does Comparison Rate Work?

The Comparison Rate is a legislation governed calculation that takes into consideration the costs associated with setting up a loan including the normal interest rate, the loan approval fee and any other upfront or ongoing fees. It excludes government fees and charges, because they are standard across all loans.

The resulting Comparison Rate can then be compared against the Comparison Rate for other loans types and loans with other lenders.

If a lender or anyone else that advertises a repayment amount within their advertisement, it is a requirement to disclose their document rate and are also required to disclose their comparison rate. This legislation is monitored by ASIC. ASIC has penalties for businesses that don’t follow procedures and also for the individuals who fail to follow procedures. These penalties can be fines and or suspensions.

Comparison rate requirements have changed since the legislation was taken into effect and these changes has been ongoing. For example the requirement of providing a comparison loan schedule at sign up or on request, has since been dropped and is now no longer a requirement. These loan schedules that were distributed were examples of several different loan scenarios that could be written and were not an example of  the comparison rate specific to the loan written individually.

For any further information that may be required about comparison rates, please go to the ASIC web site.