Comparison Rates Explained: The True Cost of a Car or Personal Loan
What a comparison rate is, how it is worked out, and why a loan with a lower interest rate can still cost more, with a worked example.
The short answer
The comparison rate rolls a loan's interest rate and most of its fees into a single percentage, so you can compare loans on a like-for-like basis. If two loans have similar interest rates but different fees, the comparison rate shows which one is likely to cost more.
In Australia, when a lender advertises an interest rate for a consumer loan, it generally has to show a comparison rate with it. For car and personal loans, the comparison rate is usually worked out on a standard example of $30,000 over 5 years.
A worked example
Two loans of $30,000 over 5 years, with fees added to the loan:
- Loan A: 9.99% p.a., no up-front fee, no monthly fee. Repayment about $637 a month. Total repaid about $38,236. Comparison rate 9.99% p.a.
- Loan B: 8.99% p.a., a $795 establishment fee and a $10 monthly fee. Repayment about $649 a month. Total repaid about $38,946. Comparison rate about 10.79% p.a.
Loan B has the lower interest rate, but Loan A is cheaper over the life of the loan. The comparison rate makes that visible at a glance. These figures are illustrative only and not offers from any lender.
What the comparison rate includes, and what it does not
The comparison rate includes the interest rate and the fees and charges you will definitely pay over a standard loan, such as establishment fees and monthly account fees.
It does not include fees that depend on what happens during the loan, for example:
- Early payout fees or break costs.
- Late payment or dishonour fees.
- Optional extras such as insurance.
It also only applies to the example it is based on. That is why every comparison rate comes with a warning that it is true only for the example given, and that different amounts and terms will give a different comparison rate.
Why your own loan may differ
Fees affect smaller and shorter loans more than larger and longer ones. A $795 fee is a bigger share of a $10,000 loan over 2 years than of a $30,000 loan over 5 years, so the true cost of a small loan can be well above its advertised comparison rate.
A balloon also changes the picture. It lowers your repayments but you pay interest on the balloon amount for the whole term, so the total cost goes up.
The surest comparison for your own situation is the total amount you will repay over the loan, including all fees, for the amount and term you actually need.
How our comparison tool shows costs
For personal-use loans, our comparison tool shows each option's interest rate, its comparison rate on the standard $30,000 over 5 years example, and an indicative repayment for the amount and term you entered, including the lender's fees and our origination fee.
For business loans, the comparison rate rules do not apply in the same way, so the tool shows the lender's base rate and a repayment that includes all costs. Our guide to how brokers are paid explains the origination fee.
Frequently asked questions
Is the comparison rate the rate I will pay?
No. You pay the interest rate. The comparison rate is a tool for comparing loans, combining the interest rate and standard fees into one figure for a standard example loan.
Why is the comparison rate higher than the interest rate?
Because it includes fees as well as interest. If a loan has no fees, its comparison rate equals its interest rate.
What loan is the comparison rate based on?
For car and personal loans it is usually based on a $30,000 loan over 5 years. The advertisement must say which example it uses.
Do business loans have comparison rates?
The comparison rate rules apply to consumer credit. Loans for business purposes are generally not covered, so compare business loans on their rates, fees and total repayments.
Sources
This guide is general information only. It does not take into account your objectives, financial situation or needs, and it is not credit, tax or legal advice. Tax and GST outcomes depend on your circumstances, so confirm them with your accountant. All finance is subject to lender approval, terms and conditions, and fees and charges apply.
Related reading
Related service: Personal loans
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