What is a comparison rate?
A comparison rate, also known as the Annual Average Percentage Rate (AAPR) helps borrowers identify the true cost of a loan. A comparison rate includes the interest charges, upfront costs and ongoing fees bundled into one interest rate. Since July 1, 2003, lenders must advertise both the interest rate and a comparison rate. For example, an advertised interest rate might be 6.8% and the comparison rate 6.95%.
How is the comparison rate calculated?
The formula takes into consideration the amount of the loan, the term of the loan, the frequency of repayments, upfront costs such as establishment fees and settlement fees, and known ongoing fees such as monthly account keeping fees. What is not included are government duties, fees for certain services that may or may not occur during the life of the loan (such as redraw fees, late payment fees, etc.) and fees that are not ascertainable at the time of the calculation. It also does not include exit fees.