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Understanding how to compare rates
Since June 2003, the Australian Consumer Credit Code has required that all lenders describe their loan terms in a uniform way, using an the average annual percentage rate (AAPR) that combines the effects of both interest payments and fees into one rate. This standard rate makes it much easier to compare financing rates across lenders, as long as the buyer knows what the comparison rate does and does not say. For example, some lenders offer introductory rates that may be several percentage points below standard rates for the same terms. These "honeymoon rates" can be attractive but they are frequently time-limited and then revert to the standard rate offered by that lender. Using the comparison rate will give a truer picture.
However, the comparison rate does not tell the whole story about the cost of the loan, either in the specific circumstances the rate describes or under other circumstances. For example, a car financier may advertise a specific rate for a five year new car loan of $25,000. But, if you choose to pre-pay that loan and there are pre-payment penalties, which are not, by definition, considered in the comparison rate, the loan may cost more than you think. If you believe that you may not keep the loan for the full term, it makes sense to be sure that the loan you choose does not have pre-payment penalties. Alternatively, the same rate may not apply if your situation is different. For example, if you intend to finance $20,000 rather than $25,000, the rate may change.
In addition, comparison rates also do not consider special services that may be offered by the lender such as on-line payment or special discounted arrangements for buyers with excellent credit such as no down payment options.
Comparison rates can be an excellent tool for comparing rates, as long as you understand what the rates do and do not cover. They should be used in conjunction with a comprehensive review of a loan offer.
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