Interest Rate vs Comparison Rate: What Is the Difference?

Have you ever looked at a loan advertisement and noticed two different percentages: an interest rate and a comparison rate?

Although they can look similar, they measure different things. Understanding the difference can help you compare loan offers more carefully instead of focusing only on the advertised interest rate.

At Sunshine Loans, we believe it is important that you understand the costs of borrowing before deciding whether a loan may be appropriate for your circumstances.

In simple terms, an interest rate tells you about the interest charged on the money you borrow. A comparison rate combines that interest rate with most compulsory fees and charges to provide a broader indication of the cost of the loan.

Moneysmart describes a comparison rate as a guide to the cost of a loan that includes interest and most fees.

Interest Rate vs Comparison Rate at a Glance

Both figures can be useful, but neither replaces checking the repayment amount, total amount repayable, applicable fees and your credit contract.

What Is an Interest Rate?

A loan’s interest rate is the percentage charged for borrowing money.

It is commonly expressed as a yearly rate, or per annum, which may be shortened to p.a.

For example, a rate displayed as 15% p.a. means the annual interest rate is 15%.

The actual amount of interest you pay can also depend on factors such as:

• How much you borrow.
• How long you borrow it for.
• How frequently interest is calculated.
• How quickly your loan balance reduces.
• Whether the rate is fixed or variable.
• Whether you make your repayments as scheduled.

An interest rate generally does not include separate fees such as:

• Establishment fees.
• Application fees.
• Administration fees.
• Missed-payment fees.

Moneysmart defines a personal loan interest rate as the rate charged on the amount borrowed, excluding fees.

Fixed and Variable Interest Rates

A fixed interest rate remains the same for an agreed period or, depending on the loan, throughout the loan term.

A variable interest rate can increase or decrease while the loan is active. Changes to the rate may affect your repayments and the total interest you pay.

When comparing loans, check which type of interest rate applies and whether there are conditions or fees associated with additional repayments or paying the loan out early.

What Is a Comparison Rate?

A comparison rate is an annual percentage that combines a loan’s interest rate with most of its fees and charges.

Its purpose is to make it easier to compare the cost of similar credit products.

Under Part 10 of the National Credit Code, credit providers generally need to include a comparison rate when advertising an interest rate for fixed-term credit that is mainly for personal, domestic or household purposes.

ASIC explains that the comparison rate includes the interest rate and most fees and charges.

Depending on the loan and the prescribed calculation, costs included may cover:

• The advertised interest rate.
• Establishment or application fees.
• Certain administration fees.
• Compulsory ongoing fees.
• Other compulsory charges forming part of the calculation.

These costs are converted into a single annual percentage.

A comparison rate is not another fee added to your loan. It is a standardised calculation designed to make the effect of interest and applicable fees easier to compare.

Why Can the Comparison Rate Be Higher Than the Interest Rate?

The comparison rate is commonly higher than the interest rate because it accounts for fees that the interest rate alone does not include.

Imagine two loans with the same advertised interest rate. One has a larger establishment fee, while the other has lower compulsory fees.

Even though their interest rates are identical, their comparison rates may be different.

The effect can be particularly noticeable with smaller loans because a fixed fee represents a greater proportion of the amount borrowed.

The loan term also matters. The effect of a fee over a relatively short borrowing period can be different from the effect of that same fee over several years.

For this reason, you should check the loan amount and term used to calculate a comparison rate before comparing it with another loan.

Moneysmart notes that comparison rates vary according to the loan terms and are only accurate for the example and assumptions used.

What Is Not Included in a Comparison Rate?

A comparison rate includes most costs, but it does not necessarily include everything you could be charged.

ASIC explains that comparison rates do not include some costs, such as government fees and charges or charges that apply only in particular circumstances.

A comparison rate also measures cost rather than product features such as repayment flexibility.

Depending on the loan, costs not reflected in the comparison rate may include:

• Missed-payment or default fees.
• Enforcement or debt-recovery expenses.
• Government duties or charges.
• Optional services.
• Fees triggered by changes you make to the loan.
• Certain early repayment costs.
• Costs that depend on your individual circumstances or repayment behaviour.

This means a loan with a lower comparison rate will not automatically be the most suitable option for you.

You should also consider:

• The scheduled repayment amount.
• The total amount repayable.
• The loan term.
• Repayment flexibility.
• Any fees that could apply if your circumstances change.

How to Compare Interest Rates and Comparison Rates

Looking beyond the most prominent percentage in an advertisement can give you a more complete picture of what borrowing may cost.

1. Compare the Same Amount and Term

Comparison rates are based on a particular loan amount and borrowing period.

A comparison rate calculated using one loan amount and term may not provide a meaningful direct comparison with a rate calculated using substantially different assumptions.

Check the example and assumptions displayed with each comparison rate before comparing them.

2. Review the Total Amount Repayable

Check how much you would repay in total if you made every scheduled repayment as required.

The total amount repayable can make the cost easier to understand because it shows you the dollar amount associated with:

• The principal.
• Interest.
• Applicable compulsory fees.

3. Identify the Relevant Fees

Depending on the product, check for costs such as:

• Establishment or application fees.
• Account-keeping fees.
• Regular administration fees.
• Missed-payment fees.
• Default interest.
• Early repayment fees.
• Balloon or end-of-loan payments.

You can review our current interest, fee and comparison-rate information on our Loan Costs page.

4. Check Whether the Advertised Rate Applies to You

Some credit providers use risk-based pricing, meaning the rate offered can depend on factors such as your financial circumstances or credit profile.

Do not assume that the lowest advertised rate will necessarily be the rate available to you.

When a product has a fixed or maximum interest rate, make sure you understand how that rate applies before entering into the credit contract.

5. Consider the Repayments and Your Budget

A loan can have a competitive rate but still be unsuitable if the repayments do not fit comfortably within your budget.

Before borrowing, consider:

• Your income.
• Essential expenses.
• Existing repayments.
• Upcoming financial commitments.
• Irregular or unexpected costs.

It can also be sensible to leave some room for unexpected expenses rather than committing all of your available income to repayments.

6. Read Your Credit Contract

Your credit contract contains the terms that apply to your particular loan, including relevant interest, fees, repayment amounts and other conditions.

Take the time to read it before accepting the loan and ask questions about anything you do not understand.

How Comparison Rates Apply to Our Loans

At Sunshine Loans, we currently offer unsecured Medium Amount Credit Contracts to eligible applicants.

Our current product information includes:

Our comparison rate is 66.2% per annum, calculated on a $2,500 loan over two years.

The $2,500 loan amount and two-year term are prescribed for the comparison-rate example. We do not currently offer our Medium Amount Credit Contracts over two years. Our actual loan terms range from 63 to 182 days.

WARNING: This comparison rate is true only for the example given and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate.

Because the comparison rate is based on a prescribed amount and term, you should treat it as a comparison tool rather than a prediction of your repayments or exact total borrowing cost.

You can also repay our loan early without an early repayment penalty. The amount of interest you may save will depend on your outstanding balance and when you repay the loan.

Every application remains subject to eligibility, assessment and approval.

As part of our responsible lending obligations, we:

• Make reasonable inquiries about your financial situation.
• Make reasonable inquiries about your requirements and objectives.
• Take reasonable steps to verify your financial situation.
• Assess whether the proposed credit contract would be unsuitable for you.
• Do not enter into a credit contract that is unsuitable for you.

You should review our eligibility requirements, frequently asked questions and Credit Guide before deciding whether to proceed.

Other Factors to Consider Before Borrowing

Cost is important, but it should not be the only part of your decision.

Before borrowing, consider whether:

• The expense is necessary or could reasonably be delayed.
• You have savings available without leaving yourself financially exposed.
• The business you need to pay could offer a payment plan.
• A lower-cost form of credit may be available.
• The repayments fit comfortably within your existing budget.
• You understand the consequences and potential costs of a missed payment.
• The loan term is realistic for your circumstances.

A short-term loan should generally be considered for a specific, infrequent expense rather than as a way to repeatedly cover regular household costs such as groceries, rent or ordinary utility bills.

If you are already struggling to pay essential expenses or existing debts, taking on another repayment obligation may make your situation harder.

Consider speaking with the business or credit provider you owe money to about hardship assistance.

You can also contact the National Debt Helpline on 1800 007 007 for free, confidential and independent financial counselling.

Frequently Asked Questions

Should I Compare the Interest Rate or the Comparison Rate?

You should look at both.

The interest rate shows the rate charged on the amount you borrow, while the comparison rate combines that rate with most fees and charges.

We also recommend checking:

• The scheduled repayments.
• The total amount repayable.
• The loan term.
• Any fees that could apply in particular circumstances.

Does a Lower Comparison Rate Always Mean a Cheaper Loan?

Not necessarily.

A lower comparison rate can help identify lower borrowing costs when you are comparing products using equivalent amounts and terms.

However, it may not reflect:

• Conditional fees.
• Differences in product features.
• Repayment flexibility.
• The specific terms offered to you.

Are Missed-Payment Fees Included in the Comparison Rate?

Not necessarily.

Charges that only apply in certain circumstances may be excluded from comparison-rate calculations. ASIC specifically notes that comparison rates do not include every fee or charge.

Check the lender’s cost information and your credit contract so that you understand what may happen if a repayment is late or unsuccessful.

For our current Medium Amount Credit Contract, a $35 failed-payment default fee applies when you fail to make a scheduled repayment.

Why Is a Comparison Rate Sometimes Based on a Term the Credit Provider Does Not Offer?

Australian comparison-rate rules prescribe particular assumptions for certain categories of credit so that consumers have a standardised reference point.

As a result, the prescribed example may use a term that is different from the product’s actual available term.

For example, our 66.2% per annum comparison rate is calculated using a $2,500 loan over two years, even though our current Medium Amount Credit Contracts have terms ranging from 63 to 182 days.

Always check the assumptions and warning displayed with a comparison rate.

Is the Comparison Rate the Amount of Interest I Will Pay?

No.

A comparison rate is an annual percentage designed to help you compare borrowing costs.

It is not a separate charge, and it does not tell you the exact dollar amount of interest you will pay.

Your actual costs will depend on factors including:

• The amount borrowed.
• Your loan term.
• Your repayment schedule.
• Applicable fees.
• Whether repayments are made as required.
• Whether you repay the loan early.

Understand the Full Cost Before You Decide

When comparing an interest rate with a comparison rate, remember that a low advertised interest rate does not necessarily tell you the full cost of borrowing.

Use the comparison rate as one comparison tool, then check:

• The scheduled repayments.
• The total amount repayable.
• Applicable fees.
• The loan term.
• Contract conditions.
• Any costs that may apply in particular circumstances.

Most importantly, consider whether the repayments are affordable without compromising your ability to meet essential expenses.

You can review our current loan costs, comparison-rate information and Credit Guide to understand how our Medium Amount Credit Contracts work.

If you believe our loan may be appropriate for your circumstances, review our eligibility requirements before applying.

All applications are subject to eligibility, assessment and approval.

The information provided in this blog is for general informational purposes only and does not constitute financial or legal advice. It is not tailored to the specific circumstances of any individual. Before acting on the information, you should consider whether it is appropriate for you, having regard to your objectives, financial situation and needs.