What Is a Comparison Rate? Everything You Need to Know

What Is a Comparison Rate? Everything You Need to Know

When comparing loans in Australia, the advertised interest rate may not show the full cost of borrowing. For this reason, many loan advertisements must also display a comparison rate alongside the interest rate. This figure is designed to help consumers better understand the combined impact of interest and certain fees when reviewing credit offers.

In this guide, you’ll learn what a comparison rate means, why it exists, what it may include (and what it may not), and how it can be used when comparing personal loans, car loans and other credit products. You’ll also learn when it may be helpful to look beyond the comparison rate and review the full loan structure before making a decision.

What is a comparison rate and how is it different from the interest rate?

A comparison rate represents the cost of a loan expressed as a single percentage figure that combines the interest rate with certain fees and charges.

The purpose of the comparison rate is to help consumers better understand the potential cost of credit by showing how fees can affect the overall rate.

In Australia, many loan advertisements must display a comparison rate alongside the interest rate under consumer credit legislation. This helps reduce the risk of advertisements highlighting a low interest rate without indicating the potential impact of fees.

Quick example

Loan A:

Interest rate: 6%
Fees: $500
Comparison rate: 8.2%

Loan B:

Interest rate: 7.2%
Fees: $0
Comparison rate: 7.2%

In this example, Loan A advertises a lower interest rate, but the higher fees increase the comparison rate. Loan B may therefore have a lower overall cost depending on the loan amount and term.

What is the difference between comparison rate and interest rate?

The interest rate shows the cost of borrowing before most fees.

The comparison rate combines the interest rate with certain fees and charges to provide a broader view of the loan’s cost.

Because your CMS can’t display tables, here’s the same information in a simple format:

Interest on loan amount

Interest rate: Included
Comparison rate: Included

Upfront fees

Interest rate: Not included
Comparison rate: Included

Ongoing fees

Interest rate: Not included
Comparison rate: Included

Government charges

Interest rate: Not included
Comparison rate: Included (where applicable)

Break costs or early repayment fees

Interest rate: Not included
Comparison rate: Not included

Real money example

You borrow $10,000 at 10% interest for 3 years. The loan includes:

• A $300 establishment fee
• A $10 monthly fee

Although the interest rate is 10%, these additional fees may increase the comparison rate. Depending on the lender’s calculation method and assumptions, the comparison rate could be higher than the interest rate.

What’s included in a comparison rate?

Comparison rates commonly include:

• The annual interest rate
• Establishment or application fees
• Monthly or annual service fees
• Mandatory ongoing charges
• Transaction fees required to maintain the loan
• Other lender-imposed charges that apply to most borrowers

Example for a car loan

A lender advertises:

• 6.5% interest rate
• $350 establishment fee
• $8 monthly fee

When these fees are included in the calculation, the comparison rate may be higher than the advertised interest rate, depending on the loan amount and term used in the calculation.

And what’s not included?

Some costs are usually not included because they vary between borrowers or only apply in certain situations.

Examples may include:

• Late payment fees
• Early repayment or break costs
• Optional add-ons (such as insurance or protection products)
• Some government charges
• Direct debit dishonour fees
• Fees for optional services not required to maintain the loan

Because these costs depend on individual circumstances or behaviour, they may not form part of the standard comparison rate calculation.

Why is the comparison rate important?

Comparison rates can help provide additional context when reviewing loan offers.

Spot when fees affect the total cost

An interest rate may appear low, but a higher comparison rate can indicate that fees may increase the overall cost.

Support more consistent comparisons

Because comparison rates are calculated using a prescribed formula and standard assumptions about loan amount and term, they can help consumers compare many loan advertisements more easily.

Understand how fees may affect the loan over time

Depending on the loan amount and term, differences in rates and fees may affect the total cost of the loan.

Provide a starting point when comparing options

Comparison rates can help highlight differences between products, although reviewing the full loan structure remains important.

Tips for using comparison rates

Comparison rates can be useful, but they work best when used alongside other information about the loan.

Know comparison rates are based on a standard example

Many comparison rates are calculated using a standard loan amount and term set by the lender or required by regulation. If your loan amount or term is different, the comparison rate may not reflect your exact borrowing cost.

Check the actual fees and charges

Some fees depend on individual circumstances, such as missed payments or changes to your loan.

Compare similar loan types

Comparison rates are most useful when comparing loans with a similar purpose, security type (secured or unsecured), and term.

Look beyond the rate

Other factors may also affect your experience with a loan, including:

• Repayment flexibility
• Loan features
• How changes to the loan are handled
• What happens if your circumstances change

Use the comparison rate as a guide

A practical approach is to use the comparison rate to shortlist options, then review the full loan terms, fees and conditions before deciding whether to apply.

Want a transparent loan up to $10,000? Meet Credit24

If you’re comparing loan options, understanding comparison rates can help you better interpret interest rates and fees when reviewing offers.

Credit24 provides information about interest rates, fees and loan terms so customers can review the structure of the product before applying.

Some features customers may consider when comparing lenders include:

• Borrow $500 to $10,000
• Fixed repayment schedule to support budgeting
• No early repayment fees
• Online application process
• Assessment and funding timeframes may vary depending on eligibility and approval
• Clear loan structure and disclosures

Australian Credit Licence 422839

Apply now:
https://www.credit24.com.au/au/apply/login

Disclaimer

IPF Digital Australia Pty Ltd, trading as Credit24, ABN 59 130 894 405. Australian Credit Licence 422839.

The information in this article is general in nature and does not consider your objectives, financial situation, or needs. Lending criteria, fees and charges apply. For product details, eligibility requirements, and full terms and conditions, visit www.credit24.com.au.