What is a comparison rate?
A quick overview
A comparison rate includes both the interest rate and most loan fees, giving you a clearer idea of the true cost of a loan.
Most people look at interest rates when choosing a loan. But the interest rate alone doesn’t tell you the full story. That’s where the comparison rate comes in. It shows the true cost of the loan by including both the rate and most of the fees. In this guide, we’ll explain what a comparison rate is, how it’s calculated, and how to use it to compare your options.
Why does a comparison rate matter?
A comparison rate is a single percentage that includes both the interest rate and most upfront or ongoing fees on a loan. It gives you a better idea of the true cost of borrowing. Lenders are required to show this rate when advertising loans. For example, a loan might have an interest rate of 6 percent, but once you add in the fees, the comparison rate could be 8.2 percent. This helps you compare apples with apples. It’s especially useful when you’re looking at different lenders offering similar interest rates but very different fee structures.
Comparison rates in context of asset finance in Australia
In asset finance, the comparison rate helps business owners compare deals on vehicle and equipment loans. It includes most costs like the establishment fee and monthly charges. However, it does not include everything. Things like early payout fees, insurance, and balloon payments are excluded. It’s a useful tool but not a complete picture. This why we only use it as one part of the decision, not the only one. A loan with a low comparison rate might still cost more overall, depending on how it’s structured.
For example, a business in Tasmania is comparing two equipment loans. One has a 5.5 percent interest rate with low fees. The other advertises 4.9 percent but has a large upfront fee and monthly charges. The first has a comparison rate of 6 percent, the second 6.8 percent. The business chooses the first option because the total cost is lower, even though the interest rate is higher.
This is why its important to ask for the comparison rate, a good broker (like us) will ensure you get the best comparison rate – not just a lower interest rate.