Whether it’s a personal loan, pay day loan or home loan every loan will come with two interest rates. One is the actual interest rate on the loan. That one is the most commonly compared as it tells you how much interest you are being charged on the loan.
To work out the actual figure each month you take the loan amount and multiply it by the interest rate and divide it by 12 and that will give you an indication on what interest amount you are likely to be paying.
For example, if you loan is $400 000.00 and your interest is 5.2% then the interest your paying is 400000 x 0.052 = 20800 / 12 = $1733.33. You can then subtract that amount from your monthly minimum payments to work out how much of the loan balance you will be paying as well.
The other rate is the comparison rate. This amount is the interest rate plus any fees or charges associated with the maintenance of the loan. It may be an establishment fee, monthly fee, or package fee but it gets added to the interest rate to give you a more in-depth look at what you are really paying.
If you compare on the interest rate alone then you may find, after fees and charges are added that you are in fact paying more than other loans with other lenders. To give you an example with what’s offered in the market as of today. There is one lender offering 3.77% pa interest rate and another offering 4.52%, on the example above that’s a difference of $3000.00 in a year so most people would go with the firs lender and save the money, right? Wrong.
The comparison rates are 5.11% on the first lender and 4.52% on the second. That means the first loan isn’t saving you money, it’s costing you an extra $2360 in fees and charges.