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Understanding comparison rates


Buying a new car is a big investment. And if you use vehicle finance to get a new car, it’s important to be clear about just how much you’ll have to pay over the life of your finance contract, so you don’t end up facing any unexpected surprises. This quick guide explains a bit about comparison rates, and other factors that may affect your choice of car loan.

How is car finance structured?

As with most loans, when you take out a car loan you’ll be charged an interest rate for the duration of the loan period. Then, on top of your payments for the value of the car and interest, you may also have to pay additional charges for things like an upfront loan approval free, or an ongoing monthly administration fee.

In many cases, the shorter your loan period is, the less nominal interest you’ll pay. Lenders may also offer a different interest rate if you make your loan payments on a weekly or fortnightly basis, rather than monthly or annually.

All these factors can have an impact on the actual amount you’ll pay over time. That’s where comparison rates can help give you a more complete picture of how much your car loan will cost. 

What does a comparison rate show?

Finance providers in Australia are required by law to provide a comparison rate whenever an interest rate is advertiesd for a consumer loan. Even though comparision rates can be calculated for business products, it's not common to do so. For vehicles, the comparison rate is calculated by taking into account:

  • how much you’ll borrow

  • the nominal interest rate

  • how long the loan is for

  • the frequency of repayments

  • loan fees and charges.

Is there anything else I need to consider?

When a comparison rate is calculated, it doesn’t factor in government fees that are the same for every lender or loan type. Comparison rates also don’t take into account ongoing costs for things like:

  • registration and insurance

  • servicing and maintenance

  • repairs

  • fuel

These costs can differ widely from one car to the next, depending on things like the type of car, the driver’s age, and how much they use the car. Even though these factors aren’t included in the comparison rate, you should still consider them when working out how much your new car will cost you all up.

Also, you may end up choosing a loan that has a higher comparison rate but more flexible features. For example, you may prefer a loan with a redraw facility, or one that doesn’t charge an extra fee if you end up paying off the loan earlier than expected.

So if you’re thinking of buying a car using car finance, the comparison rates of different finance options are just one thing you need to consider. That way you can choose the best finance solution for your needs and budget, and you may even save some cash in the long run. 


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