What does "comparison rate" actually mean?
A comparison rate combines a loan's interest rate with most of the standard fees you have to pay, such as an establishment fee or ongoing account fee, based on one example loan amount and term. The result is shown as a single, all-in annual percentage.
It helps you compare broadly similar loans based on cost, rather than looking at the interest rate alone and potentially overlooking the fees added on top.
It's just as useful to understand what a comparison rate won't tell you. It's not the exact rate you'll receive, your repayment amount, the total amount you'll repay, a guarantee that every possible fee is included, or an indication that you'll be approved or that the loan is affordable for you.
A comparison rate is a useful starting point, but it's calculated using an example loan amount and term. If your loan amount, term or applicable fees are different, your actual costs can be different too.
Why is the comparison rate often higher than the advertised interest rate?
The difference usually comes down to fees. An interest rate only shows what you're charged for borrowing the money. Add in the standard compulsory fees like establishment or account fees, and the comparison rate will usually climb higher.
That's the part of an interest rate that can be hidden. A loan can look cheaper at first glance but cost more once the fees are factored in.
It's also worth knowing that some credit products use fee-based pricing rather than a traditional interest rate, which is another reason that the interest rate alone doesn't always give you the full picture.
Why isn't the comparison rate based on my loan?
A comparison rate isn't usually worked out using the exact amount and term you're planning to borrow. Instead, it's calculated using one of six example combinations set out in Australian credit law:
| Example loan amount | Example term |
|---|---|
| $250 | 2 weeks |
| $1,000 | 6 months |
| $2,500 | 2 years |
| $10,000 | 3 years |
| $30,000 | 5 years |
| $150,000 | 25 years |
Example loan amount
Example term
- $250
- 2 weeks
- $1,000
- 6 months
- $2,500
- 2 years
- $10,000
- 3 years
- $30,000
- 5 years
- $150,000
- 25 years
The lender uses the example that most closely matches that type of loan. It might land close to what you're borrowing, or it might be quite different. Either way, the published comparison rate is based on the example, not your exact loan amount or repayment period.
Three figures, three different jobs
Part of the confusion comes from expecting one number to do all the work. These three figures each have a different job:
| Figure | What it tells you | What it doesn't tell you |
|---|---|---|
| Interest rate | What you're charged for borrowing | Fees charged separately |
| Comparison rate | Interest plus most standard fees, shown as one annual rate for an example loan | Every possible cost, or your exact personal outcome |
| Total amount payable | How much you'd repay altogether under the stated assumptions | Future rate changes, missed repayments or some early-repayment costs |
Figure
What it tells you
- Interest rate
- What you're charged for borrowing
- Comparison rate
- Interest plus most standard fees, shown as one annual rate for an example loan
- Total amount payable
- How much you'd repay altogether under the stated assumptions
What it doesn't tell you
- Interest rate
- Fees charged separately
- Comparison rate
- Every possible cost, or your exact personal outcome
- Total amount payable
- Future rate changes, missed repayments or some early-repayment costs
None of the three replaces the others. A lower comparison rate doesn't automatically mean a lower regular repayment. A longer loan term can shrink each repayment while growing the amount of interest you pay overall.
What might the comparison rate leave out?
A comparison rate doesn't include every cost that could come up. Government charges and fees that only apply in certain situations such as late-payment, default or early-repayment fees, may sit outside the calculation depending on the contract.
Compulsory fees that can be calculated upfront generally need to be included. ASIC has also published guidance on how comparison rates should be presented and calculated fairly.
The practical takeaway: a comparison rate is a strong starting point, not a promise that every dollar you'll ever be charged is already baked in.
Why the loan with the lower interest rate isn't always the cheaper one
Here's an illustrative example only, using rounded, made-up figures for two hypothetical loans of the same amount and term:
Loan A has an interest rate of 7.99% and a comparison rate of 9.40%, while Loan B has an interest rate of 8.49% and a comparison rate of 8.95%.
Loan A has the lower interest rate. But Loan B has the lower comparison rate, because its mandatory fees are lower. Once those fees are factored in, Loan B looks cheaper on this comparison.
But don't stop at the comparison rate. To work out which loan actually costs less for the amount and term you want, you'll need to check the repayment amount and the total amount you'd repay as well.
Will I actually get the advertised comparison rate?
Not necessarily. A comparison rate is based on an example loan, not your personal application. The rate and repayments you're offered can depend on the lender, the product, the amount and term you choose, and your own circumstances.
Your credit history doesn't change the comparison rate shown in the ad. It can, however, affect the interest rate or loan terms a lender offers you depending on how they assess your application.
And if the loan has a variable rate, remember that it can change later too.
That doesn't make the comparison rate misleading. It just isn't designed to tell you exactly what you'll personally pay, or whether you'll be approved.
Does every loan have to show a comparison rate?
Usually, fixed-term consumer credit ads that show an interest rate also need to show a comparison rate. But there are exceptions including some continuing, revolving and low-cost credit contracts.
Some types of credit are exempt from this requirement so if a credit product doesn't show a comparison rate, that isn't necessarily a red flag. It's still worth checking the actual fees, repayments and terms directly.
The like-for-like check
Before deciding that one comparison rate is better than another, make sure you’re comparing similar loans. Check whether they use the same loan amount and term, whether both are secured or unsecured, whether the interest rates are the same type (such as fixed, variable or introductory), which compulsory fees are included, and what costs may sit outside the comparison rate. It’s also worth checking what the repayments and total amount repaid would be for the amount you actually want to borrow.
If the loans differ on some of these points, the comparison rates may not be truly like-for-like, even if one number looks lower.
What else is worth checking?
Once you've checked you're comparing like with like, look at the things the comparison rate can't tell you: your personalised rate and repayment, how much you'd repay altogether, what happens if you repay early, and what happens if you miss a repayment.
Also check whether the lender charges a fee for repaying the loan early. These terms vary, so it's better to check than assume anything.
If repayments become difficult, contact your lender early and ask about hardship support.
Frequently asked questions
Because it includes most standard compulsory fees on top of the interest rate. Those extra costs usually push the comparison rate higher.
Most compulsory fees that can be calculated upfront, such as establishment or ongoing account fees. Optional fees, or fees that only apply in certain situations, might not be included.
Government charges and costs that only arise in certain situations, such as late-payment, default or early-repayment fees, may sit outside the calculation depending on the contract.
Not necessarily. It's based on an example loan amount and term. The rate or terms you're offered can depend on the lender, product, amount, term and your own circumstances.
Lenders calculate it using one of six example loan amounts and terms set out in credit law. They use whichever example most closely matches that type of loan, not the exact amount or term you're borrowing.
Yes. A comparison rate doesn't capture every possible cost, so it's still worth checking the actual repayment amount and how much you'd repay altogether.