What Is a Comparison Rate and Why Does It Exist?
A comparison rate is a standardised interest rate that includes both the advertised interest rate and most fees and charges associated with a loan. In Australia, lenders are legally required to display comparison rates alongside their advertised rates for consumer credit products, including car loans.
This requirement exists because advertised interest rates alone can be misleading. A lender might offer a low headline rate but charge substantial establishment fees, ongoing account fees, or other charges that significantly increase the true cost of borrowing. The comparison rate helps you see past the marketing and understand what you will actually pay.
The comparison rate is calculated using a specific formula mandated by the National Consumer Credit Protection Act. For car loans, it is based on a secured loan of $30,000 over a term of five years. While this standardised calculation might not match your exact loan amount or term, it provides a consistent basis for comparing different loan products.
How to Read and Compare Rates Effectively
When shopping for a car loan, you will typically see two rates displayed: the advertised rate and the comparison rate. Understanding the relationship between these numbers reveals important information about a loan's fee structure.
If the comparison rate is significantly higher than the advertised rate, the loan likely carries substantial fees. A difference of more than 0.5 percentage points suggests meaningful additional costs that you should investigate further. Ask the lender for a complete breakdown of all fees to understand exactly where these costs come from.
Conversely, a comparison rate very close to the advertised rate indicates a loan with minimal fees. While this is generally positive, ensure you understand what fees might apply in specific circumstances, such as early repayment or missed payment charges.
When comparing loans from different providers, focus primarily on comparison rates rather than advertised rates. Two loans with the same advertised rate of 6.99 percent might have comparison rates of 7.2 percent and 8.1 percent respectively, representing a substantial difference in actual cost.
Limitations of Comparison Rates
While comparison rates are valuable tools, they have limitations you should understand to avoid being misled.
Standardised Calculations: Because comparison rates are calculated on a $30,000 loan over five years, they may not accurately reflect your specific situation. If you are borrowing a different amount or over a different term, the actual impact of fees on your loan may differ from what the comparison rate suggests.
Fees Not Always Included: Some fees are excluded from comparison rate calculations. Early repayment fees, redraw fees, and fees for optional features are typically not included. If you anticipate using these features, factor these costs into your comparison manually.
Variable Rate Complexity: For variable rate loans, the comparison rate reflects current rates only. If rates increase during your loan term, your actual cost will exceed what the comparison rate indicated at the time you took out the loan.
Use our car finance calculator to input different interest rates and see exactly how they translate to monthly repayments and total interest paid over your specific loan amount and term.
Common Fees That Affect Comparison Rates
Understanding the types of fees that contribute to comparison rates helps you evaluate loan offers more effectively.
Establishment Fees: Also called application or setup fees, these one-time charges cover the lender's cost of processing your loan application. They typically range from $150 to $500 for car loans and are included in comparison rate calculations.
Ongoing Account Fees: Monthly or annual account keeping fees charged throughout your loan term contribute significantly to comparison rates. A $10 monthly fee adds $600 over a five-year term, which noticeably increases your comparison rate.
Documentation Fees: Some lenders charge fees for preparing loan documents. These are typically small but add to the comparison rate calculation.
Security Registration Fees: For secured car loans, the lender registers their interest in the vehicle on the Personal Property Securities Register. This fee is usually passed on to the borrower and included in the comparison rate.
Using Comparison Rates in Your Car Buying Journey
Armed with an understanding of comparison rates, you can make smarter decisions when financing your vehicle purchase.
Start by obtaining quotes from multiple lenders, ensuring each quote includes the comparison rate. Create a spreadsheet comparing not just the rates but also the specific fees each lender charges. This detailed comparison often reveals differences that raw comparison rates might obscure due to the standardised calculation method.
Consider how your actual loan differs from the standard comparison rate calculation. If you are borrowing significantly more or less than $30,000, or over a term different from five years, calculate the actual total cost for your specific scenario. Fixed fees have a larger proportional impact on smaller loans and shorter terms.
Do not ignore loans with slightly higher comparison rates if they offer features that provide genuine value to you. Flexible repayment options, the ability to make extra repayments without penalty, or superior customer service might justify a marginally higher rate.
Beyond Comparison Rates: Total Cost of Borrowing
While comparison rates are essential for initial screening, the ultimate measure of a loan's value is its total cost to you specifically. This requires calculating exactly what you will pay based on your loan amount, term, and anticipated usage of loan features.
Add up the total of all repayments you will make over the loan term. Subtract the original loan amount. The difference is your total cost of borrowing, including all interest and fees. This concrete dollar figure makes comparison straightforward and meaningful.
Factor in any incentives or cashback offers, but be wary of these distorting your judgment. A $500 cashback offer means nothing if it comes with a comparison rate that costs you an extra $1,000 over the loan term.
Finally, use our free car finance calculator to run multiple scenarios with different interest rates and terms. Seeing the actual dollar amounts helps you make confident decisions based on real costs rather than abstract percentages.
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Use our calculator to see how different rates affect your total repayments.
Car Finance Calculator Team
Our team of finance experts is dedicated to helping Australians make informed decisions about car loans. We provide accurate, up-to-date information to guide you through your vehicle financing journey.