ALG Australian Lending Group

Tag: interest rate

  • Interest Rate vs. Comparison Rate – What’s The Difference?

    Most of us already know what the interest rate is when talking about loans. However, the comparison rate is less frequently talked about. It was actually created to benefit consumers by allowing them to accurately compare finance products such as home loans or car loans between different banks and non-bank lenders.

    Interest rate: A proportion of the loan that is paid by the borrower in addition to the original loan value which is presented as a percentage.

    Comparison rate: A summation of the costs incurred from a loan inclusive of interest rate and all additional expenses such as account keeping fees.

    Should I look at the interest rate or comparison rate?

    Both.

    The interest rate is no doubt an important aspect of every loan. Generally speaking, the lower, the better. So it’s helpful to know what interest rate is being offered on the loan that you’re considering.

    However, because the interest rate alone doesn’t consider additional costs such as account keeping fees, early exit fees etc. It can sometimes be misleading. A lender could offer a loan with a really low interest rate but have excessive additional fees which mean that you end up spending considerably more than expected.

    Here’s a simplified example comparing 2 loans:

    Loan A has a higher rate and lower fees. Loan B has a lower rate and higher fees. In some circumstances the cost of fees can outweigh the low interest rate. This is an example of that happening.

    Loan A
    $50,000 borrowed.
    Interest rate 3%.
    5 year term.
    Fees and charges = $950
    Final cost = 58,913.70

    Comparison rate = 3.57%

    Loan B
    $50,000 borrowed.
    Interest rate 2.5%.
    5 year term.
    Fees and charges = $2490
    Final cost = 59,060.41

    Comparison rate = 3.62%

    When considering the comparison rate, it shows us that Loan B is the more expensive loan, despite having a lower interest rate. Without looking at the comparison rate, a borrower may choose Loan B under the impression that it would be the cheaper of the two and then end up spending more compared to Loan A. It’s important to note that lenders don’t advertise the amount of their additional fees, which is why the comparison rate is such an important element in the finance industry.

    A good rule of thumb to follow is that the larger the gap there is between the interest rate and the comparison rate, the greater you are getting charged for additional fees. For example, an interest rate of 5% and a comparison rate of 8% for the same loan means you are getting charged a significant amount in fees that are separate from the interest repayments.

  • How Can I Improve My Loan Interest Rate and Chance of Approval?

    You’ll be pleased to hear that there are a multitude of things you can do to try and decrease the interest rate on consumer loans as well as improving your chances of receiving an approval!

    Some of these tips involve long term actions that would potentially be done before visiting your broker, whilst others are quite quick solutions to work in your favour.

    What can I do before visiting a broker?

    1. A history of stable employment

    This is always attractive to lenders as it suggests that you have a steady income and are less likely to struggle making repayments.

    Specifics:
    Generally, lenders look at the last 6 months to see if you’ve kept the same job in that time. Overall, they often look at 3 years of employment history to determine how often you change employers.

    Exceptions:
    If you’ve changed jobs but stayed in the same industry in the last 6 months, it’s not a huge concern for lenders. It also pays to talk to one of our experienced finance brokers as there can be further exceptions.

    2. Deposit Amount

    How much money are you willing to contribute as a deposit? As far as loans go, the greater your deposit, the more inclined a lender is to approve your loan application and offer you a lower interest rate.

    3. Credit Score

    The higher your credit score, the better! As a general rule, anything over 600 is considered satisfactory. However, keep in mind that the standards change between lenders.

    Specifics:

    • By ensuring that all current loan/debt repayments are made on time for their entire lifespan means that they won’t incur any negative reporting on your credit file.
    • Minimise loan applications as each one is listed as a credit enquiry, which can raise worry with lenders if there are an excessive amount.

    4. Stay away from payday lenders

    Payday lenders such as Nimble will have a detrimental effect on your ability to acquire a loan. Many banks and non-bank lenders refuse to lend to anyone with a payday loan within a 6 month period of that loan finishing.

    5. Are you living with parents or renting?

    Lenders often provide a better rate to someone who is renting rather than living at home with parents. The logic stems from the fact that renting is generally more expensive, so you’re already proving your ability to commit to those recurring expenses. Whereas, it is anticipated that people living at home will at some point move out and therefore incur higher living expenses. This could cause some people to no longer afford or prioritise their loan repayments. So the rate is higher because the risk for the bank is higher.

    What are some quick solutions to improving my chances of securing a loan?

    1. Delete your Afterpay account

    Getting rid of your Afterpay (or any buy now, pay later accounts) increases your chances of getting accepted and could potentially increase your borrowing capacity. Finalise your repayments and close the account!

    2. Cancel your credit cards

    If you have the ability to pay off any outstanding debts on your credit card, it is a great idea to do this and then cancel them all together. It’s likely that your lender will ask you to do this regardless.

    3. Age of your asset

    If you’re getting a loan to purchase an asset such as a car, then the age of the asset will actually affect your interest rate. The newer, the better according to lenders.

    Lenders generally have specified interest rates for assets of different age groups. For example, assets that are 3-6 years old may claim the same interest rate. However, these age groups differ for each lender, as do the rates.

    Finance brokers, however, are privy to these specific policies for each lender. This is just another reason that our brokers here at ALG are able to get you the best loan. We compare lenders by their policies and rates, specific to you.