Comparison Rate Calculator
Identify the true cost of funding by including all fees and charges.
Your Effective Comparison Rate:
0.00%
Understanding the Comparison Rate Logic
In finance, the advertised "Base Percentage" often masks the real cost of a contract. The Comparison Rate is a mathematical tool designed to provide transparency by condensing the base rate, establishment costs, and recurring servicing fees into a single percentage figure.
The Mathematics Behind the Calculation
The calculation uses an iterative process to find the "True Cost of Capital." It accounts for:
- Principal Sum: The initial amount of funding provided.
- Nominal Rate: The percentage applied to the balance before fees.
- Fixed Costs: One-off amounts charged at the start (Establishment Costs).
- Variable Costs: Recurring charges that accumulate over the duration of the contract.
Realistic Example:
Imagine a funding amount of $150,000 over 25 years with a base rate of 5.50%. If you pay a $600 establishment fee and a $10 monthly servicing fee, your "Base Percentage" is 5.50%, but your Comparison Rate is 5.64%. Those seemingly small fees add significant weight to the total obligation.
Imagine a funding amount of $150,000 over 25 years with a base rate of 5.50%. If you pay a $600 establishment fee and a $10 monthly servicing fee, your "Base Percentage" is 5.50%, but your Comparison Rate is 5.64%. Those seemingly small fees add significant weight to the total obligation.
Why the Comparison Rate is Crucial
When comparing different providers, a lower base rate doesn't always mean a cheaper deal. A provider offering 5.0% with high hidden fees might actually be more expensive than a provider offering 5.2% with zero fees. Using the comparison rate allows for an "apples-to-apples" evaluation of financial products.
Formula Breakdown
While the exact legal formula varies by jurisdiction, the core logic follows the Net Present Value (NPV) principle. It finds the internal rate of return (IRR) where the present value of all future payments (including fees) equals the net amount of funding received after initial costs are deducted.