What is a car loan comparison rate
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What is a car loan comparison rate?
When shopping for a vehicle, it’s easy to fall for the advertised interest rate, especially if it’s lower than other interest rates in the market.
But beware. Before you jump at the first rate that catches your eye, do a little research first. Is this the nominal interest rate or the comparison interest rate? Not sure what that means? Let’s explain.
What is a car loan comparison rate?
When it comes to vehicle finance, there are two interest rates to consider:
- Nominal / advertised interest rate. The nominal or advertised interest rate is what the lender charges you on the loan. No fees are included in this number. Lenders tend to advertise the nominal rate to attract customers because it is often lower than the comparison rate.
- Comparison loan rate. The comparison loan rate includes the nominal interest rate plus fees and charges such as loan establishment, administration, and monthly and other ongoing fees.
When you compare car loan rates, look for the comparison rate, because it’s possible a loan with a higher advertised rate might cost you less over the life of the loan than a loan with a lower advertised rate.
Confused? Hopefully, this hypothetical example will clear things up:
| Interest rate | Fees & charges | Comparison rate | |
| Car Loan A | 4.85% | 0.80% | 5.65% |
| Car Loan B | 5.20% | 0.10% | 5.30% |
As you can see, at first glance Car Loan A seems to be cheaper, because it has a lower advertised interest rate. However, when factoring in the fees and charges, it’s actually
Car Loan B that has the lower overall cost, because its fees are lower than Car Loan A’s.
When comparing car finance, the comparison interest rate gives you a clearer picture of how much the loan will cost over the full term. You’ll also be able to more accurately calculate what your monthly repayments will be.
What other factors affect vehicle finance?
While comparing loan interest rates can help you find vehicle finance with the best rates, there are other factors that influence what you will pay over the full life of the loan. These include:
- The amount borrowed
- The term of the loan
- Whether it’s a secured or unsecured loan
- The frequency of repayments
- Whether you’re opting for a balloon payment plan
- Your credit rating
- The type and age of the vehicle you’re buying
- Whether you are a homeowner or renter
For instance, a shorter term with larger monthly payments will reduce your overall cost, potentially saving you hundreds of dollars over the life of the loan. If you have a home loan and are up to date with your payments, your lender may be willing to drop your car loan interest rate even more.
Another factor to take into consideration is flexibility. Some car loans tie you into a term with fixed monthly repayments and no option to settle the loan early. Should you want to pay the loan off sooner by increasing your monthly payments or settling the balance early, check that the conditions of the loan allows for that before you sign a contract.
Finding the best car loan rate
Now that you understand car loan interest rates, you can confidently start shopping for a new car. To find the best car loan rates in Australia*, use our handy car loan calculator or get a free online quote. To discuss your finance needs with one of our agents, call us on 1300 358 358.
