Interest Rate vs Comparison Rate: What's the Difference?
When comparing personal loans in Australia, you may notice that lenders advertise two different percentages: an interest rate and a comparison rate.
Although these figures look similar, they serve different purposes. The interest rate tells you the rate charged on the money you borrow, while the comparison rate incorporates the interest rate and most fees and charges into a single percentage.
Understanding the difference can help you compare loan offers more effectively, identify costs that might otherwise be overlooked and make a more informed borrowing decision.
In this guide, we'll explain how interest rates and comparison rates work in Australia, show you a practical example and outline what to check before choosing a personal loan.
What Is an Interest Rate?
An interest rate is the percentage a lender charges for allowing you to borrow money. It is usually expressed as an annual percentage.
For example, suppose you borrow A$10,000 at a fixed annual interest rate of 8%.
The interest charged over the loan term depends on several factors, including the outstanding balance, repayment schedule and loan structure. With a typical amortising personal loan, your repayments gradually reduce the principal balance, so interest is generally calculated on the remaining amount rather than the original balance throughout the entire term.
The advertised interest rate does not necessarily include establishment fees, monthly account fees or other charges.
This means a loan with a low interest rate may not be the cheapest option overall.
Fixed vs variable interest rates
Personal loans may have fixed or variable interest rates, depending on the lender.
A fixed rate generally remains unchanged for the agreed period, making repayments more predictable. A variable rate can change according to the terms of the loan agreement, potentially affecting your repayments or total interest cost.
When comparing products, check which rate applies, whether it is fixed or variable, and whether the lender offers the advertised rate to all eligible applicants.
What Is a Comparison Rate?
A comparison rate is a percentage designed to help consumers understand and compare the cost of credit.
Under Australia's National Credit Code, comparison rates must be included in advertisements for relevant fixed-term credit products intended primarily for personal, domestic or household purposes when the applicable requirements are met.
The comparison rate incorporates the interest rate and most fees and charges associated with the loan.
However, it does not include every possible cost. Government charges and certain conditional fees, such as charges that may apply when repaying a loan early, can be excluded.
ASIC explains the purpose and limitations of comparison rates in its guidance on the National Credit Code.
Why comparison rates matter
Consider two hypothetical personal loan offers:
- Loan A: An advertised interest rate of 7.00% and a comparison rate of 9.00%.
- Loan B: An advertised interest rate of 8.00% and a comparison rate of 8.50%.
Loan A has the lower advertised interest rate. However, Loan B has the lower comparison rate.
This difference may indicate that Loan A has higher fees or other costs included in the comparison-rate calculation.
The figures above are illustrative, not current market offers. Actual costs depend on the lender's fees, the loan amount, the term and the terms of the contract.
A lower comparison rate can be a useful starting point, but you should still examine the actual loan offer before deciding.
Interest Rate vs Comparison Rate: Key Differences
| Feature | Interest rate | Comparison rate |
|---|---|---|
| What it measures | The rate charged on the borrowed amount | Interest rate plus most included fees and charges |
| Includes most loan fees? | No | Yes |
| Useful for understanding interest costs? | Yes | Yes, as part of a broader cost comparison |
| Useful for comparing overall borrowing costs? | Not on its own | Generally more informative |
| Includes every possible fee? | No | No |
| Guarantees the cheapest loan? | No | No |
The most useful approach is to examine both figures alongside the loan's repayment schedule and total amount payable.
How to Compare Personal Loans Using Comparison Rates
If you're comparing personal loans in Australia, follow these steps.
1. Compare loans with similar terms
Start with products offering similar loan amounts and repayment periods.
A loan over two years may have a different comparison rate from a loan over five years. Comparing products with different assumptions can make the results harder to interpret.
Check the amount and term used in the lender's comparison-rate example.
2. Review the fees and charges
Look beyond the headline percentages.
Depending on the product, relevant costs may include:
- Establishment or application fees
- Monthly account-keeping fees
- Late-payment or default fees
- Early repayment charges, where applicable
- Other charges specified in the loan contract
Check which fees are included in the comparison rate and which may be charged separately or only under certain circumstances.
3. Check your actual offered rate
An advertised rate is not necessarily the rate you will receive.
Lenders may assess factors such as your income, expenses, credit history, existing debts and the loan product you choose.
Review the formal offer and confirm the interest rate, comparison rate, fees and repayment amount before accepting the loan.
4. Calculate the total amount payable
A comparison rate is a useful screening tool, but the total amount payable can provide a clearer picture of your expected financial commitment.
Use the lender's repayment calculator to estimate your repayments, then confirm the figures against the loan contract.
If you plan to make extra repayments or pay off the loan early, ask whether additional charges or restrictions apply.
5. Consider the loan features
The cheapest loan on paper may not be the most suitable for your circumstances.
For example, you might value the ability to make extra repayments without a fee. Another borrower might prefer predictable repayments under a fixed-rate arrangement.
Consider both the cost and the flexibility of the product.
Example: How Fees Can Change the Cost of a Loan
Suppose you are comparing two hypothetical personal loans, each for A$10,000 over three years.
For simplicity, assume the following:
Loan A
- Interest rate: 7.00% per year
- Establishment fee: A$300
- Monthly account fee: A$10
Loan B
- Interest rate: 8.00% per year
- Establishment fee: A$100
- Monthly account fee: A$0
Loan A has the lower interest rate, but its fees are higher.
Over 36 months, the stated fees alone would total:
- Loan A: A$300 + (36 × A$10) = A$660
- Loan B: A$100 + (36 × A$0) = A$100
Loan A therefore has A$560 more in the specified fees than Loan B, before accounting for differences in interest costs and the treatment of the establishment fee.
This does not establish which loan is cheaper overall. To determine that, you would need to calculate the interest and repayments using each lender's actual terms, then compare the total amount payable.
The example illustrates why the advertised interest rate should not be your only consideration.
Are Comparison Rates Always Accurate for Your Situation?
Comparison rates are useful, but they have limitations.
A published comparison rate is calculated using prescribed assumptions. Your actual borrowing costs may differ because of the loan amount, repayment term, product features, fees and the rate offered to you.
Some costs may also fall outside the comparison-rate calculation, including certain government charges and fees that apply only in specific circumstances.
For this reason, treat a comparison rate as a guide rather than a guarantee of your final borrowing costs.
Before signing a contract, request a breakdown of the costs that apply to your specific loan.
Where Can You Compare Personal Loans in Australia?
You can begin by reviewing product information directly from lenders and using their repayment calculators.
The Australian Government's Moneysmart website also provides independent educational information about personal loans, comparison rates and borrowing costs.
Useful resources include:
- Moneysmart: Personal Loans
- Moneysmart: Comparison Rate Definition
- ASIC: National Credit Code and Comparison Rates
Comparison websites can also be useful, but check how they select and rank products. Some earn money through advertising, referral fees or promoted placements, so their listings may not cover every available option.
Always verify important details with the lender before applying.
Frequently Asked Questions
Is the comparison rate higher than the interest rate?
It is often higher because it incorporates the interest rate and most included fees and charges. However, the relationship depends on the applicable calculation and product terms.
Should I always choose the loan with the lowest comparison rate?
Not automatically. A lower comparison rate can indicate lower costs under the calculation assumptions, but other features and charges may affect your decision.
Compare the actual offer, total amount payable, repayment flexibility and eligibility requirements.
Does the comparison rate include all fees?
No. Some charges may be excluded, including certain government charges and fees that apply only in particular circumstances.
Read the lender's product information and contract to understand the costs that may apply to you.
Can my actual interest rate differ from the advertised rate?
Yes. Depending on the product, a lender may offer different rates based on its assessment of your circumstances and eligibility.
Check the rate in your formal loan offer rather than assuming the advertised rate will apply.
Where can I find reliable information about comparison rates?
Moneysmart, operated by the Australian Securities and Investments Commission, provides consumer education on personal loans and comparison rates. You can also consult ASIC's guidance on the National Credit Code.
The interest rate and comparison rate are both useful when comparing personal loans in Australia, but they tell you different things.
The interest rate shows the rate charged on the money you borrow. The comparison rate combines the interest rate with most included fees and charges to make cost comparisons easier.
For a more complete assessment, compare both rates, review the loan fees, calculate the total amount payable and check the terms that apply to your circumstances.
Taking the time to understand these details can help you avoid overlooking important costs and make a more informed decision before committing to a personal loan.
Sources and further reading
- Australian Government Moneysmart — Personal Loans: https://moneysmart.gov.au/loans/personal-loans
- Moneysmart — Comparison Rate: https://moneysmart.gov.au/glossary/comparison-rate
- Australian Securities and Investments Commission — National Credit Code: https://asic.gov.au/regulatory-resources/credit/credit-general-conduct-obligations/national-credit-code/
Disclaimer: This article provides general educational information only and does not constitute personal financial or legal advice. Loan rates, fees, eligibility criteria and contract terms vary between lenders. Verify current information with official sources and the relevant lender before making a financial decision.
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