What Is a Comparison Rate
In short, comparison rates determine what your loan will really cost you. They save you from the hard work required to compare and determine the costs of different loans. However, keep in mind that they shouldn’t be the deciding factor when you search for a loan.
Also, remember that all lenders are required by law to display a comparison rate when they advertise a loan to you. If you pay attention and spot this rate, you may end up getting a better deal on your home loan.
The Basics
A comparison rate is a figure that’s derived from the length of the loan, its amount, the repayment frequency, the fees and charges that come with the loan, and from the interest rate.
Given this, the true purpose of a comparison rate is to help the customer identify the true, real price of a loan.
This rate basically reduces to a single percentage figure the things we have mentioned above – mainly the loan’s fees and charges and its interest rate.
How to Use Comparison Rates?
When you’re searching for loans, you should always compare their fees and charges, interest rates, and product features. Even the slightest difference can change the value of the payments that you have to make on your loan.
To help you better understand and learn how to use comparison rates, let’s take a look at the following examples.
1. Let’s say that we have a loan that comes with 8% interest rate, 0.5% in fees and charges, and with a comparison rate of 8.5%.
2. The second loan will have 8.25% interest rate, 0.1% in fees and charges, and a comparison rate of 8.35%.
Even though the first home loan has a lower interest rate – which may make it very appealing for most borrowers – you will end up paying less for the second home loan.
Comparison Rate Calculation
It is important for you to understand that lenders will advertise their comparison rates based on certain loans over a particular period of time. If the loan amount or period increases, you may end up with a different figure than the one advertised.
In this respect, you should know what the comparison rate calculation includes:
Loan amount – most lenders will base their rate on a home loan of $150,000
Loan term – the rate will usually be calculated on a loan of 25 years
Repayment frequency
Interest rate
Monthly account fee – if any
Annual fee – if any
Establishment fee – if any
Valuation fee – if any
Mortgage documentation fee – if any
Settlement fee
The Bottom Line
With a comparison rate, lenders are no longer able to advertise an interest rate that might be too good to be true. This makes them honest, as well as accountable in terms of unexpected high fees and charges.
Basically, before thinking that you found the best loan for you, it is important to know as much as possible about it – its comparison rate, as well as all of the things that are taken into account when calculating it.
In case you are still in doubt and don’t know if a certain loan would fit your needs, then you can contact us. We will help you find a loan that exceeds your current one and will be the best for your needs – our team of experts will guide you through the entire process.
If you have any more questions or just need information, simply reach out and contact us today!
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