What a comparison rate is
Moneysmart describes a comparison rate as a percentage you can use as a guide to the true cost of a loan. It combines the interest rate with most fees and charges into one yearly figure, so a loan with a low headline rate but high fees does not look cheaper than it really is.
Interest rate
The yearly rate charged on the amount you owe, sometimes called the annual percentage rate. On its own it ignores establishment and account fees.
Comparison rate
The interest rate plus most fees and charges, shown as one yearly percentage for a specific example loan amount and term.
Total amount repayable
The dollar amount you would pay over the whole loan if every repayment is made on time. It is often the clearest figure to compare.
How to read a comparison rate
- 1
Find the warning
An advertised comparison rate comes with a warning that names the loan amount and term used in the calculation. The rate is accurate only for that example.
- 2
Compare like with like
Line up loans with the same amount and term. A comparison rate for a large, long loan tells you little about a small, short one.
- 3
Check what is left out
Costs that depend on what happens later, such as late-payment, default or early-repayment fees, are generally not built into the rate.
- 4
Look at the dollars
Ask for the repayment amount and the total amount repayable for the amount and term you actually want.
- 5
Test it against your budget
A competitive rate does not help if the repayment would squeeze rent, food, bills or other essentials.
Why a lower interest rate can cost more
Moneysmart uses a simple example to show why the comparison rate matters more than the headline rate.
| Loan | Interest rate | Comparison rate | What it suggests |
|---|---|---|---|
| Lender A | 3% | 6% | Fees add a lot to the cost of this loan. |
| Lender B | 4% | 4.5% | Fewer fees, so it may cost less overall despite the higher interest rate. |
The rate you are offered can differ from an advertised rate. The figures in your offer and contract are the ones that count, so read them before you accept.
What a comparison rate does not tell you
- Whether the repayments fit your budget.
- What missing a payment would cost, such as default fees or extra interest.
- Fees you might pay later, such as early-repayment or dishonour fees.
- Whether you can make extra repayments or pay out early without a fee.
- Whether a cheaper option, such as a payment plan or a No Interest Loan, would do the job.
Evercrest Finance doesn't quote rates in its guides. Its Rates and fees page shows the interest rate and comparison rate together, with the comparison rate warning. The loan cost calculator estimates the interest, fees, repayments and total for an amount and term you choose.
Comparison rate questions
Is the loan with the lowest comparison rate always the cheapest?
Not always. A comparison rate is accurate only for the example amount and term in its warning, and it leaves out some fees. Compare the total amount repayable for the amount and term you need, and check the fees that apply if something goes wrong.
Why is the comparison rate higher than the interest rate?
Because it adds most upfront and ongoing fees to the interest. The bigger the gap between the two, the more the fees are adding to the cost.
What is the difference between an annual percentage rate and a comparison rate?
The annual percentage rate is the yearly interest rate charged on what you owe. The comparison rate adds most fees and charges to that rate, so it is usually a better guide to the overall cost.
How should I compare loans that charge fees instead of interest?
Some products, such as buy now pay later, charge fees rather than interest, so a percentage rate can be less useful. Compare the total amount repayable, the size of each repayment and when each payment is due.