What is a comparison rate?

Why it exists

An interest rate on its own does not tell you what a loan costs. A 6.5% loan with a $600 establishment fee and $10 monthly account fees can easily cost more than a 7.2% loan with no fees at all.

Australian credit law requires lenders to publish a comparison rate whenever they advertise an interest rate for consumer credit, precisely so that comparison is possible on a single figure.

What it includes and excludes

Generally included:

• The interest rate
• Establishment and application fees
• Ongoing account-keeping or service fees
• Valuation fees where they are a standard part of the product

Generally excluded:

• Government charges, such as stamp duty and registration fees
• Fees triggered by something you do, like early repayment costs, redraw fees or late payment fees
• Costs that cannot be determined in advance

So the comparison rate is a good measure of the standard cost of the loan, and says nothing about what happens if you repay early or miss a payment.

The standard example

This is the part worth understanding properly.

The comparison rate is calculated on a standardised loan scenario set by regulation, not on the loan you are applying for. That means the figure is comparable between lenders — which is its purpose — but it is not the cost of your loan.

To find out what a specific loan actually costs, put your real amount, term and fees into the APR calculator. It solves for the effective rate on your own numbers rather than an example, and shows the total cost of credit in dollars.

Comparison rate versus interest rate

Both figures matter, for different reasons. Your repayment is calculated from the interest rate, so that is the number to use in the loan repayment calculator. The comparison rate is the number to use when deciding between lenders.

"From" rates and eligibility

Advertised rates are frequently the lowest in a range, available only to borrowers meeting particular criteria — a strong credit history, a certain loan-to-value ratio, a secured rather than unsecured loan, or a specific purpose such as an electric vehicle.

The rate you are offered comes after assessment. Some lenders offer a pre-approval or an indicative rate that does not require a full application; ask, because each full application is recorded on your credit report and several in a short period is visible to other lenders.

What else to check

1. Total amount repayable in dollars — the figure that makes the percentage concrete.
2. Early repayment costs. Fixed-rate loans often carry break costs; variable loans usually do not. This is outside the comparison rate.
3. Redraw and extra repayments. Whether you can pay more and get it back matters more than a small rate difference for many borrowers.
4. Whether the rate is fixed or variable, and for how long.