You have two quotes in front of you. One is at 6.9% and the other is at 7.2%. The decision looks easy, until you look at the fees.
Why headline rates mislead
A rate is only one input into what you pay. A lender can lower its rate and recover the difference through an upfront fee, a monthly fee or tighter conditions. If you compare the rate alone, you can end up choosing the dearer loan.
The fix is to turn each quote into total dollars paid, and then compare those.
The worked example
You want to borrow $35,000 over five years (60 months). Here are the two quotes.
- Quote A: 7.2% a year, no fees.
- Quote B: 6.9% a year, a $600 establishment fee and a $12 monthly account fee.
Step 1: work out the monthly repayment. Using the standard repayment formula (or our repayment calculator):
- Quote A: $696.35 a month.
- Quote B: $691.39 a month.
Quote B's repayment is $4.96 a month lower. That is the attraction.
Step 2: add the fees.
- Quote A: no fees.
- Quote B: $600 upfront, plus $12 × 60 months = $720. Fees total $1,320.
Step 3: add everything up.
| Quote A | Quote B | |
|---|---|---|
| Repayments (60 months) | $41,780.96 | $41,483.51 |
| Fees | $0 | $1,320.00 |
| Total paid | $41,780.96 | $42,803.51 |
Quote B's lower rate saves about $297 in interest over five years, but its fees cost $1,320. Net, Quote B is about $1,022 more expensive.
Step 4: look at the comparison rate. Quote A has no fees, so its comparison rate is the same as its rate, 7.2%. Quote B's comes out at about 8.4% once the fees are folded in. The comparison rate points the same direction as the dollar sum, which is exactly what it is designed to do.
Other things to line up
Dollars are the backbone of the comparison, but check the details:
- Same loan amount and term. A quote for 60 months and one for 48 are not comparable.
- Same type of rate. Fixed and variable behave differently. See our guide to fixed vs variable.
- Balloon or no balloon. A residual changes the repayment and the interest. We covered the trade-off in an earlier post on balloon payments.
- Early payout terms. If you might pay off early, the charges matter.
- Late-payment and default fees. They do not appear in the comparison rate, but you should know them.
- Insurance or add-ons. Some quotes bundle products you may not need.
A tidy way to record it
Make a small table with one column per quote and rows for rate, comparison rate, monthly repayment, upfront fees, ongoing fees, balloon, term and total paid. The act of filling it in will often show you a difference you would have missed.
When the cheapest is not the best
Price is not everything. Flexibility to make extra repayments, a clear process and a lender who explains things well all have value. The aim is to know what you are paying for, not necessarily to pick the lowest figure at all costs.
If you would like help collecting real quotes to compare, you can start an enquiry here, then run each one through the method above. MoneySmart also has independent calculators you can use to cross-check.
The bottom line
The lowest advertised rate and the lowest cost are not always the same thing. Multiply, add the fees, and compare totals; that simple routine takes minutes and can save four figures.
This article is general information with illustrative figures. It is not advice or an offer of credit.
