Please stop using Comparison Rates

[puerazaelis]

Government mandated comparison rate (i.e. the advertised one) is, of course, useless.

$150,000 loan amount over a 25 year term is not practical in any way.

But I still get a lot of people asking about comparison rates for their specific loan amounts, thinking this will give a good indication of which loan is better.

But lets look an extreme example to prove a point.

Consider the following loan options, all for a $500,000 loan over 30 years:

• Option A: 6.00% Comparison Rate
• Option B: 6.00% Comparison Rate
• Option C: 6.00% Comparison Rate

This makes it appear that choosing any option will provide you a similar result.

But a better way to compare the loans would be to consider all fees and ongoing interest/repayments:

• Option A: 6.00% interest. $0 upfront/termination/ongoing fees.
  
• Option B: 0.00% interest. $579,711 settlement fee. $0 ongoing/termination fees.
• Option C: 2.00% fixed for 2 years. Reverts to 6.40%. Upfront fee: $200. Ongoing fee: $395 p.a. Discharge fee: $395.

If leaving it for 30 years, your decision is irrelevant. If

 

[whoisjrsmith]

@puerazaelis Ahh some basic finance discussion on ausfinance. That's refreshing. I'd hope most here would be able to work out how to choose the best loan for their individual situation. I also hope that this gives some a better idea if they didn't know.

 

[puerazaelis]

@whoisjrsmith I actually wrote this because I've had a client this week asking for comparison rates.
Then today had someone in another post trying to convince everyone that comparison rates are all that needs to be considered.
Definitely a good portion of people that still pay attention to them.

 

[whoisjrsmith]

@puerazaelis Well they are good. Really useful actually. If you fit the criteria they are using.. like you mentioned in your post lol

I came to this page for personal finance stuff. I don't know if it used to be better but I quickly learned it's just full of overly left leaning complaining and political whining. Well 90% with a little finance stuff scattered around.

 

[puerazaelis]

@whoisjrsmith I find it's mostly just a discussion about whether someone should pay off their HELP debt lol

 

[whoisjrsmith]

@puerazaelis that's the most recent. Took over from what's your homeloan rate, or this is how you get your bank to drop the rate.

I miss the good old wmr the world's falling in stuff from last year

 

[dpardue]

@whoisjrsmith haven't seen that since they changed how blocking worked on reddit.

 

[whoisjrsmith]

@dpardue Yea I don't do the blocking thing. Don't really know how it works now or before

 

[dpardue]

@whoisjrsmith wmr does the blocking thing. If you ever failed to be 100% supportive you got blocked.

 

[whoisjrsmith]

@dpardue I dint know if I ever got blocked by him, we had some great discussions, didn't agree in much, and quite stubborn but we typed lots of shit at eachother lol

 

[thoriso]

@dpardue I agree with @whoisjrsmith I argued with wmr about some things and agreed about others. He never blocked me.

 

[dpardue]

@thoriso well I guess not being 1 of the 500 he blocked makes you his special friends.

 

[jennieg]

@whoisjrsmith Years ago, there would be endless posts comparing ETFs. Nowadays it’s endless posts complaining about how expensive housing is or HECS indexation.

 

[resjudicata]

@whoisjrsmith You just call anyone who explains why your point of view is incorrect as overly left leaning and dismiss anyone raising valid issues you dont like as politcal whining.

It's not the children who are wrong champ...

 

[whoisjrsmith]

@resjudicata Are you following me? Finance isn't about politics mate. Sooner you lot understand that the world isn't out to help you and you need to help yourself the better off you will be

 

[bogdan]

@whoisjrsmith I am not the one you targeted this at but I am pretty stunned at your lack of self awareness, mate.

"finance isn't about politics"

Finance discussions here include policies and are most certainly political.

"Sooner you understand the world isn't out to help you"

Jesus Christ, this wasn't raised as a concept but this right here is you inserting very political, very presumptuous assumptions onto this discussion.

 

[clough]

@puerazaelis This is very very helpful and I am deeply appreciative of you writing this, and doing so clearly. It is why I am here, and I have learnt about important matters through this post.

Take my award, this is one of the best posts I have encountered here, plus that you are not here to gloat, be judgmental about peoples worries, but simply be incredibly helpful in face of others difficulties and misunderstanding, rather than exploit them or crow over them, is so positive and refreshing, thank you!

 

[puerazaelis]

@clough Thank you so much.

The kind words and award are both appreciated!

 

[sarahc59]

@puerazaelis Comparison Rate is a flawed measure, but it is a hell of a lot better than what came before ie nothing.

But just like any complex scenario - and taking a loan should be treated as such - any single measure/metric will be problematic.

 

[wayofthepromise]

@sarahc59 Yeah it would be fine if it was based on an amount closer to the average loan size (maybe 500k) instead of 150k.