The Comparison Rate
When assessing the effective cost of a loan, you will need to consider a few possible charges and not just the interest rate. Other costs and charges can include bank fees and up-front or settlement charges. The comparison rate (also called Mandatory Comparison Rate or MCR or the Effective Rate) is an interest rate calculated by the lender that lets you compare the total cost of a loan between products and lenders. This total cost is expressed as an annual interest rate.
The Comparison Rate is calculated using a financial repayments formula that takes into account the amount and duration of the loan, the repayment frequency (e.g. weekly, monthly) , the interest rate and any fees and charges levied on the loan. As fees and charges set by lenders can vary between customers and products the Comparison Rate will help you compare many different types of loans, although it is important to remember that the cost or interest on a loan is just one factor that you should assess in determining whether a loan is suitable for you and will meet your needs.
Other factors that may increase the effective cost of a loan but are worth considering include the flexibility to repay early or redraw or the level of documentation required to obtain the loan.
Lending Hub’s P2p Loans
Lending Hub will provide Comparison Rates on all loans listed on the Lending Hub once we go live. The Comparison Rate is required under the Consumer Credit Code and the calculation for Lending Hub loans will include:
- The maximum interest rate as set by the borrow or average interest rate as set by lenders
- Settlement fees
- Any other fees we may charge to the borrower (currently nil)
Costs that are excluded are:
- Government and statutory fees
- Fees and charges that are event-based and may or may not apply throughout the life of your home loan, e.g. Late payment fees, redraw fees or early repayment fees
More Information on Comparison Rates
For more information you can visit the following sites that provide further information:
- Understanding Credit Comparison Rates (WA)