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What is a Comparison Rate?

As the owner of a car dealership, friends often ask me this question. The general feeling is that it’s some type of spin in a car ad. Actually it’s quite the opposite. Car advertising which involves the promotion of vehicle finance must, by law, include the comparison rate which relates to the particular finance deal being advertised. 

What is a comparison rate?

The comparison rate does exactly as it suggests, it allows consumers to accurately compare the finance deal, by forcing the advertiser to include all components of the finance contract which may ultimately effect what the consumer pays over the life of the loan. For example, this prevents promotion of a very low interest rate to make an offer look attractive, but then stacking the loan with fees and charges which push up the payment to the consumer and the income to the financier. 

A Comparison rate takes into consideration the loan term, the interest rate, payment frequency as well as upfront and ongoing fees, to arrive at a percentage rate which a consumer can compare easily to other finance offers, i.e. they are all calculated the same way. For the purposes of arriving at the Comparison Rate, the calculation assumes the loan amount will be $30,000 for all loans, so that all Comparison rates are calculated equally. 

Legal guidelines published by regulators suggest that where a car is being advertised with a finance component, the ad should include the drive away price of the car and the comparison rate. These elements should be easily visible and obvious to a private consumer viewing the advert. 

The fine print of the ad must contain other important elements such as the breakdown of fees and charges in the finance contract, the term of the offer and other important details calculated into the finance contract such as the deposit amount, if any, and the term of the loan.