Difference Between Interest Rate and Comparison Rate
Looking for a personal loan, vehicle finance, mortgage, or some other type of finance? You may have noticed something called ‘comparison rate’ showing up as well as the usual interest rate. If you’re confused about the difference between interest rate and comparison rate then you’ve come to the right place. Both are important figures to consider when you’re shopping around for the best loan deal. So we’ll break each one down and explain how to use both to your advantage.
Overview:
- What is an interest rate?
- What is a comparison rate?
- Is the comparison rate higher?
- Why is the comparison rate more than the actual rate?
- Why should you compare rates?
- Comparison rate vs interest rate: which rate is more important?
- How to choose the best loan option for you
- Get a small personal loan with no hidden fees
What is an interest rate?
When you borrow money, whether for a mortgage, car loan, or personal loan, the lender charges you interest as compensation for lending you the money. This rate is a fundamental factor that determines the total amount you will repay over the life of the loan. The higher the interest rate, the more you’ll end up paying.
Interest rates can be fixed or variable. Fixed rates remain constant throughout the loan term, providing stability in repayments. On the other hand, variable rates can fluctuate based on market conditions, potentially impacting your monthly payments.
What is a comparison rate?
Comparison rates are a way for you to get a truer sense of the total cost of your loan. They take into account not only the interest but also various fees and charges associated with the loan. This includes application fees, annual fees, and any other upfront or ongoing costs.
Comparison rates can help you to compare different loan products quickly and make a more informed decision about the best loan option for you.
Read more: What Does Comparison Rate Mean?
Is the comparison rate higher?
Usually, a comparison rate will be higher than the advertised interest rate because it takes into account additional costs associated with the loan, not just the interest.
Why is the comparison rate more than the actual rate?
Comparison rates are based on an example loan agreement and may not 100% match the cost of your individual loan. The actual rate you pay may be lower for a number of reasons, including:
- You negotiate for a better rate based on your individual circumstances
- You are applying for less money
- The loan has a longer repayment period
- You use an offset account to bring down the amount of interest being paid
- The bank or lender may waive certain fees, or they may not apply to your situation
That is why it’s still important to read what costs are being included and whether they will be applicable to you. You might be missing out on a better deal by only considering the comparison rate in your research.
Why should you compare rates?
Comparison rates make it easier to make quick comparisons between loan products but they do have their limitations.
For example, if the loan has a comparatively low interest rate but a high comparison rate, it could seem like a bad deal compared with other loan options. However, if you look more closely at the additional costs, you might find that not all of them apply to your circumstances. In that case, it may work out cheaper to apply for the loan option with a lower interest rate but higher comparison rate.
So, whether you’re eyeing a mortgage, car loan, or personal loan, remember to keep both figures in mind as you work through your options.
Comparison rate vs interest rate: which rate is more important?
Both comparison rates and interest rates are important to consider. Interest rates help you understand what your repayments will be. But comparison rates complete the picture by giving an idea of how much additional cost will be associated with the loan.
How to choose the best loan option for you
There are many factors to consider when you’re shopping for the best loan for you. Beyond interest and comparison rates, there are the terms and conditions to consider. Plus, any additional features you would like to include or possible discounts.
If you’re struggling to decide what financial option will be the best fit for you, a personal loan broker, mortgage broker, or other financial expert is a good place to get some information. Even if you decide not to use their services to broker a loan deal for you, they often can still offer some advice to get you started.
Get a small personal loan with no hidden fees
At Swoosh, we’re always upfront about our rates and fees. Whether you need a small cash loan to see you through some unexpected expenses, a debt consolidation loan to make payments easier, or a quick cash loan for any other reason, we’re here to help. Apply online today for fast, easy finance.
