Comparison rate vs interest rate: the number that actually matters

Every loan ad in Australia shows two rates. The big one is the interest rate. The smaller one next to it, usually with an asterisk, is the comparison rate. They can sit more than a full percentage point apart, and the gap is where the real cost of a loan hides. Here is what each number actually tells you.

The interest rate

The interest rate is the percentage the lender charges on your outstanding balance. It drives the headline repayment, and it is the number lenders advertise hardest because it is the smaller of the two. What it leaves out is everything else you pay: establishment fees, monthly account fees, and the rest.

The comparison rate

The comparison rate is the interest rate with the loan's compulsory fees folded in, expressed as a single percentage. It exists because Australian law requires it: any advertised rate must carry a comparison rate so borrowers can see past a low headline number propped up by high fees.

A loan at 6.5% with a $400 establishment fee and $10 a month in account fees is genuinely more expensive than a loan at 6.9% with no fees. The comparison rates make that visible where the interest rates hide it.

The catch in the fine print

Every comparison rate is calculated on a standard example, usually $30,000 over five years for car and personal loans. If your loan is bigger, smaller, longer or shorter than the example, the true effect of the fees on your loan shifts. Fixed dollar fees hurt small loans much more than large ones: a $400 fee is 4% of a $10,000 loan but barely noticeable on $100,000. So treat the comparison rate as a ranking tool between loans, not as your exact cost.

What neither number shows

• Conditional fees. Late payment fees, early exit fees on fixed loans, and dishonour fees are not compulsory, so they sit outside the comparison rate. If you might pay a loan out early, an exit fee matters more than a few points of comparison rate.
• Features with value. Free extra repayments and redraw do not appear in either number, but for a borrower who pays ahead, they can be worth more than a small rate difference.
• Your actual rate. Most lenders now price to your credit profile, so the advertised range and the rate you are offered can differ. The advertised floor rate goes to the strongest files.

How to use the numbers when comparing

• Compare loans on the comparison rate first, never the headline rate alone.
• Check the example the comparison rate assumes against your actual amount and term.
• Read the fee schedule for the conditional fees the comparison rate excludes.
• Get personalised quotes rather than relying on advertised floors, since your rate depends on your profile.
• Use the repayment calculator to turn any rate into a weekly figure you can budget against.

Where Loanseekers fits

Loanseekers compares your situation across 70+ lenders on real quotes rather than advertised headline rates, and an enquiry does not affect your credit score. Our specialists can also flag the fee structures behind the rates, which is where loans that look identical stop being identical.