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Comparison Rate

Definition of 'Comparison Rate'

A ‘comparison rate’ is a measure of the true cost of a loan or credit facility.

Interest can be charged monthly, quarterly, or annually, and various fees are added to the cost of credit. Lenders will tend to advertise the best bits of the cost calculation, and hide the worst bits in smaller print, making it hard for most people to make an easy comparison. A comparison rate is designed to cut through the marketing hype and to help consumers make a more informed decision on the actual, expected cost of credit.

As its name suggests, a comparison rate provided by one lender can be directly compared with a comparison rate from another lender, as they are calculated on the same basis.

When calculating a comparison rate, a lender includes the interest rate and ‘ascertainable fees and charges’ – which are those that are always likely to be paid during the life of the credit facility. These might include things such as application fees, monthly, quarterly or annual charges, and in the case of mortgages, the cost of valuations, security and legal fees.

Fees and charges that are NOT included in the calculation of a comparison rate are those that are not compulsory or which arise due to something that might happen to change the nature of the credit facility. For example, if a loan is repaid early, then early termination fees are not included in comparison rate calculations, because for most borrowers there is no intention to repay early. Or if additional finance is required during the term of the credit facility, any additional fees or redrawing fees are excluded from the calculation.

Because they are common to all credit facilities, any government levies or statutory fees are not included in the calculation of the comparison rate.

Other countries have similar yardstick measures of the cost of credit. For example the UK uses ‘annual percentage rate’ or ‘APR’, which is also a measure of the total cost of credit, expressed as the rate of interest charged on an annualised basis after adding all other costs of the credit facility.

Comparison rates are really useful for comparing one lender’s product against another, but they are not entirely foolproof – they are simply a guide to the cost of credit. Be sure to check that the basis of the calculation of the comparison rate – the amount borrowed, the term, and the interest rate – are consistent with your intended loan or credit facility. Also ensure that the basis of the calculation of the comparison rate shown in examples given by different lenders are similar to each other, otherwise the comparison might not be as valid as it could be.

When comparing credit facilities, the comparison rate is not the only thing to consider. Some loans, for example, may have unique features that are more important to you than a small difference in the cost of credit. The reputation of the credit provider is also important. Be guided by our Banking and Credit Card Survey to see what other customers think about the customer service provided by different credit providers.

When used in connection with mortgages or loans, a comparison rate may be referred to as an Average Annual Percentage Rate (AAPR).

Use the links below to locate the term you are looking for. If you can't locate it, please get in touch.

Credit Jargon Starting 'G'

Credit Jargon Starting 'I'

Credit Jargon Starting 'J'

Credit Jargon Starting 'L'

Credit Jargon Starting 'M'

Credit Jargon Starting 'S'

Credit Jargon Starting 'T'

Credit Jargon Starting 'V'

Credit Jargon Starting 'W'

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