What the interest rate measures
A loan’s interest rate is the price of borrowing the money, expressed as a percentage per year (p.a.). On most instalment loans it is applied to the balance still owing, so as you pay the loan down, the interest portion of each repayment shrinks and the principal portion grows.
The rate says nothing about the fees that come with the loan. That is the job of the comparison rate.
P = amount borrowed, r = monthly rate (annual rate ÷ 12), n = number of months
What a comparison rate adds
In Australia, lenders advertising a rate on many consumer loans must also show a comparison rate. It rolls the interest rate and most upfront and ongoing fees into one annual percentage, calculated on a standard example loan so quotes can be set side by side. ASIC’s MoneySmart site has a plain explanation of how it works.
It is a guide, not a guarantee. The calculation uses a set loan size and term, so if yours differs, so will the true figure. Some costs, such as government charges or fees that depend on what you choose to do, may be left out.
A worked example
Take a $30,000 loan over 5 years at 7.50% p.a. The repayment is $601.14 a month and the interest over the term is $6,068.31. Now add a $350 establishment fee and a $10 monthly account fee.
| Item | No fees | With fees |
|---|---|---|
| Interest rate p.a. | 7.50% | 7.50% |
| Monthly repayment | $601.14 | $611.14 |
| Fees over 5 years | $0 | $950 |
| Total interest | $6,068.31 | $6,068.31 |
| Comparison rate (approx.) | 7.50% | 8.70% |
The headline rate has not moved, yet the cost has: $950 of fees over five years lifts the effective annual cost by about 1.2 percentage points. That is the gap the comparison rate is designed to expose.
How to use it when comparing
- Compare comparison rates only for loans of a similar size and term.
- Ask for a fee schedule in writing, including early-payout and late-payment costs.
- Check whether a balloon or residual is included in the example.
- Use the calculator to check the repayment against the lender’s figure.
The RBA publishes background on how interest rates are set in the economy at rba.gov.au.
Quick questions
Is the comparison rate the rate I will pay?
No. You pay the interest rate in your contract plus any fees that apply. The comparison rate is a standardised measure for comparing offers, based on an example loan.
Why is the comparison rate higher than the interest rate?
Because it includes fees and charges as well as interest. The more fees a loan carries, the bigger the gap tends to be.
Does every loan have a comparison rate?
Requirements vary by loan type and who the borrower is. Ask the lender what costs are included in any figure they quote.
Illustrative only. Every figure on this page is a worked example, not an offer or a quote. Use the repayment calculator to test your own numbers, then compare real quotes in writing.
Ready to see what is actually available to you? You can start a finance enquiry here.