Mandatory Comparison Rates
New Part 9A of Uniform Consumer Credit Code
The Consumer Credit Code (Queensland) Amendment Bill 2002 was introduced
into the Queensland Parliament on 6 March 2002 and was passed on 18 April
2002. The Act provides that:
- a comparison rate must be included in any advertisement for a fixed term
credit product that contains an annual percentage rate;
- a credit provider, finance broker and linked supplier, must display and
have available for collection by members of the public, copies of a comparison
rate schedule; and
- the limitation period for the commencement of civil penalty applications
under the Code is six years.
Consumer Credit (Queensland) Amendment Act 2002
(these documents link to the Office
of the Queensland Parliamentary Counsel website)
Regulations
Regulations prescribe the method of calculating the comparison rate and the
loan amounts and terms which are to be used for the purposes of comparison rates
in advertising and in comparison rate schedules.
The regulations were made by Governor in Council on 6 March 2003. A copy of
the Final Regulation can be downloaded below. They are in force from
1 July 2003.
Consumer Credit Amendment Regulation (No1) 2003
(this document links to the Office
of the Queensland Parliamentary Counsel website)
Commencement of Amendments
Mandatory comparison Rates are in force from 1 July 2003.
Comparison Rates - A Consumer Guide
What is a comparison rate?
A comparison rate is a tool to help consumers identify the true cost of a loan.
It is a rate which includes both the interest rate and fees and charges relating
to a loan, reduced to a single percentage figure. For example, a bank's advertised
interest rate may be 5.49% and its comparison rate 6.75%.
When must I be provided with a comparison rate?
Comparison rates only have to be provided for:
- credit which is wholly or mainly for personal, domestic or household purposes;
- fixed term credit - that is, credit that must be repaid within a specified
time period. (A home loan with a term of 25 years, and a car loan with a term
of 5 years are examples of fixed term credit. In contrast, credit cards, which
do not have to repaid within a particular time period, are examples of continuing
credit).
From 1 July 2003:
- a comparison rate must be included in any advertisement for fixed term
consumer credit which contains an interest rate; and
- consumers must be provided with comparison rate schedules - that is, lists
of comparison rates for a standard range of loan amounts and terms - by credit
providers, finance brokers, and linked suppliers (suppliers of goods and services
who refer customers in need of finance to particular credit providers).
How is a comparison rate calculated?
Comparison rates are calculated in accordance with a standard formula, which
takes into account:
- the amount of the loan;
- the term of the loan;
- the repayment frequency;
- the interest rate; and
- the fees and charges connected with the loan, except for
- government charges, such as stamp duty or mortgage registration fees;
- fees and charges which may or may not be charged, because they depend
on some event which may or may not occur (for example, fees for early repayment
or redraw fees); and
- fees and charges which are not ascertainable at the time the comparison
rate is provided.
Comparison rates in advertisements
As different loan amounts and terms produce different comparison rates, comparison
rates in advertisements must be based on the amount and term in a legislated
standard list that is most typical of the loan being advertised.
For example, the standard list includes a loan of $30,000 for 5 years, which
is similar to a typical car loan, and $150,000 for 25 years, which is similar
to a typical home loan.
A credit advertisement must clearly state the amount and term on which a comparison
rate is based.
Comparison rate schedules
A comparison rate schedule is a list of comparison rates for a range of standard
loan amounts and terms for a particular credit product.
The standard amounts and terms have been set in legislation and a comparison
rate must be provided for all of the listed amounts that are generally available
for that credit product.
As they use the same loan amounts and terms, comparison rate schedules can
be used to compare the comparison rates of different credit products.
Comparison rate schedules must be made available at any premises of a credit
provider, finance broker or linked supplier at which consumer credit products
are advertised or at which members of the public can lodge credit applications
in person.
A relevant comparison rate schedule must also accompany any credit application
that is sent or given to you by a credit provider, finance broker or linked
supplier. Whenever credit products are advertised on the internet, electronic
access to a relevant comparison rate schedule must also be made available.
Points to remember when using comparison rates
-
A comparison rate can be a useful tool for comparing the cost of different
loans, but it is important to consider all of a loan's features and not
just focus on the comparison rate.
Remember that the comparison rate does not include government fees and charges
or fees and charges which will only charged in certain circumstances. Therefore
the comparison rate may not provide a complete picture of the total cost of
a loan.
A comparison rate also does not take into account some factors which may
make a loan more attractive, such as fee free banking, or flexible repayment
arrangements. You should give careful consideration to whether these features
are important to you and the effect they will have on the cost of the loan.
-
The amounts and terms shown on a comparison rate schedule do not represent
all the possible combinations of amounts and terms.
This means the amount and term of your particular loan may not be included
in the comparison rate schedule. In order to get an idea of the comparison
rate which applies to your loan, look at the comparison rate for the amount
and term closest to the amount and term of your loan.
Credit providers, finance brokers and suppliers linked to credit providers
are not required to provide you with a comparison rate for your particular
loan amount and term, but some may be willing to do so if you ask them.
-
Credit advertisements and comparison rate schedules may sometimes state
whether a comparison rate is based on a secured loan (that is, a loan for
which the credit provider takes a mortgage over property) or an unsecured
loan (where no mortgage is taken).
This is because there can be a significant difference in the comparison
rate for a secured loan and an unsecured loan of the same value, due to
the higher interest rates usually charged for unsecured loans and the higher
up-front fees for secured loans.
If a comparison rate is based on a secured loan, it is unlikely to be accurate
for an unsecured loan of the same value, and vice versa.
Where can I get further information?
A list of frequently asked questions about comparison rates is available
at www.creditcode.gov.au.
Questions can also be directed to your nearest Fair Trading Centre.
A copy of a Consumer Guide to Comparison Rates can be downloaded below.
Comparison Rates - Frequently Asked Questions
Why don't comparison rates have to be provided for continuing credit products?
The comparison rate formula requires the amount and term of a loan to be known.
In the case of continuing credit products such as credit cards, however, neither
the amount nor the term of the loan are known in advance.
What does the warning accompanying a comparison rate mean?
The warning advises consumers that the comparison rate is accurate only
for the particular loan amount and term on which it is based, as different amounts
and terms will produce different comparison rates.
The warning also advises consumers of the limitations of comparison rates,
by noting that:
- as a comparison rate does not include government fees and charges or fees
and charges which are only charged in certain circumstances, it may not provide
a complete picture of the total cost of a loan;
- a comparison rate does not take into account some factors which may
make a loan more attractive, such as fee free banking, or flexible repayment
arrangements.
The warning is intended to make consumers aware that, while a comparison
rate can be a useful tool for comparing the cost of different loans, it is important
to consider all of a loan's features and not just focus on the comparison rate.
Are credit application and establishment fees included in the comparison
rate calculation?
Yes. The comparison rate formula includes credit fees and charges which are
payable before credit is provided and which are payable even if the credit is
not provided.
Are fees paid to brokers, lawyers and valuers included in the comparison
rate calculation?
The comparison rate calculation includes fees and charges payable in connection
with a credit contract or mortgage, except for:
- government charges, such as stamp duty or mortgage registration fees;
- fees and charges which may or may not be charged, because they depend on
some event which may or may not occur (for example, fees for early repayment
or redraw fees); and
- fees and charges which are not ascertainable at the time the comparison
rate is provided.
Fees charged by brokers, lawyers, and valuers will only be included in the
comparison rate calculation if they are payable in connection with the credit
contract.
Generally, if you have no choice but to pay a fee or charge, it will be included
in the comparison rate, provided the charge is ascertainable whether the comparison
rate is provided and it is not a government fee or charge.
Therefore if the credit provider requires you to pay a valuation fee, for example,
this will be included in the comparison rate calculation. However if you employ
a valuer independently of the credit provider the fee will not be included in
the comparison rate.
What can I do if the amount or term of my loan are not listed in the comparison
rate schedule?
The amounts and terms shown on a comparison rate schedule do not represent
all the possible combinations of amounts and terms.
This means the amount and term of your particular loan may not be included
in the comparison rate schedule. In order to get an idea of the comparison rate
which applies to your loan, look at the comparison rate for the amount and term
closest to the amount and term of your loan.
If I do not expect to keep a loan for the full term, does that make any
difference to the comparison rate?
No. The comparison rate must be calculated in accordance with a standard formula,
which takes into account the term of the loan as stated in the credit contract.
The contractual term is always used in the calculation of the comparison rate,
whether or not the consumer intends to keep the loan for that term.
Does the comparison rate differ for interest only and principal and interest
loans of the same amounts and terms?
The comparison rate will usually be slightly higher for an interest only loan
than for an equivalent principal and interest loan, because slightly more interest
is paid on an interest only loan.
Are home loans which feature a line of credit covered by the comparison
rate requirements?
The home loan is a fixed term credit product, and is therefore covered by the
comparison rate requirements. The line of credit is an extra feature, and is
not covered by the comparison rate requirements as it is a continuing credit
product.
This means that the comparison rate for a home loan with a line of credit only
applies to the fixed term home loan.
If a credit application is made over the telephone, must a comparison rate
be provided?
No, a comparison rate doesn't have to be provided if a credit application is
made over the phone.
Are advertisements which say that a loan is interest free required to contain
a comparison rate?
No. These advertisements do not feature an interest rate and so do not have
to provide a comparison rate.
Do advertisements which state how much you will save on a loan have to contain
a comparison rate?
Not unless they also contain an interest rate. Comparison rates only have to
be provided in advertisements which feature an interest rate.
Does the repayment frequency affect the comparison rate, and if so, could
the comparison rate be manipulated by using the repayment frequency that produces
the lowest comparison rate?
Different repayment frequencies have only a very minor effect on the comparison
rate. For example, changing the repayment frequency from fortnightly to weekly
on a loan with an interest rate of between 6% and 10% will usually reduce the
comparison rate by about 0.01%.
The comparison rate formula requires the comparison rate to be calculated on
the basis of the repayment frequency which is required by the credit contract.
Most credit providers have a standard contract for their credit products, which
will stipulate a certain repayment frequency.
A copy of Frequently Asked Questions in relation to Comparison Rates can be
downloaded below.
If you have any questions please direct these by email to:
Ian Clyde at ian.clyde@justice.vic.gov.au
Statements of Enforcement Policy
Six Statement of Enforcement policies have now been converted into regulations.
The Statement of Enforcement Policies were drafted to clarify a number of issues
in relation to comparison rates.
" * " indicates those statement of enforcement policies that have
been made into regulations
|
