A guide to understanding comparison rates

When comparing loan products like personal loans, home loans and car loans, you may notice two different rates associated with each loan option: the interest rate and the comparison rate. The interest rate explains the rate of interest you’ll pay on that loan. The comparison rate is an adjusted rate that considers more than just the interest. But which should you pay attention to? Here’s a guide to understanding interest rates vs comparison rates when choosing the loan for you.

What is an interest rate?

A loan’s interest rate is the percentage at which you’ll pay interest on the amount you borrow. When choosing a loan, many borrowers shop around to get the lowest rate, as the difference in interest paid can be significant.

What is a comparison rate?

A comparison rate, however, compares loans based on more than just their interest rate. Comparison rates consider the total cost of the loan, and calculate an adjusted rate based on other fees, charges and terms associated with the loan product.

This allows borrowers to look more critically at loan products and decide things like whether a lower rate with higher fees is better than a slightly higher rate with no fees.

What do comparison rates consider?

Comparison rates take into account several factors beyond just an interest rate. These include:

• Loan fees and charges, like application, settlement and valuation fees
• Loan term
• Payment frequency
• Revert rates (the rate the loan reverts to after a fixed period ends)

The terms on which a comparison rate is calculated are generally noted in the fine print and are standardised across the banking industry.

Things to consider when using comparison rates

While comparison rates might sound like the perfect way of comparing all aspects of a loan’s cost, there are several other things that aren’t included in these assessments. Things like:

• Government fees and charges, e.g. stamp duty (and any relevant concessions)
• Government grants (like the First Home Owners Grant)
• Lenders Mortgage Insurance (LMI)
• Offers like fee waivers or cashback

In addition to these extra factors, it’s equally important to look beyond these rates and focus on your personal situation as a whole.

Your budget, your income, your desired loan term and even your lifestyle goals can all play a role in deciding which loan is right for you. Speak to a qualified home loan professional for help comparing loans in the context of your personal circumstances.

Our Key Fact Sheet Calculator is also another helpful resource which can provide a summary of the loan you are looking at, including a personalised comparison rate and an estimation of the costs of your home loan. It also explains what will happen if interest rates rise or if you roll from a fixed rate.