A comparison rate is a single percentage figure that combines the interest rate of a loan with most of its fees and charges, so that two loans can be compared on something closer to their true cost.
It exists because an advertised interest rate on its own is easy to make look attractive. A lender can advertise a low rate and recover the difference in establishment fees and monthly service fees. The comparison rate is the mechanism designed to make that visible.
The consumer site of the financial regulator of Australia, Moneysmart, defines it as a rate that helps you work out the true cost of a loan — one that includes the interest rate, and most fees and charges relating to a loan, reduced to a single percentage figure.
The important word in that definition is most. If you are weighing up options, our car finance hub is the place to start.
Interest rate vs comparison rate: what the difference tells you
| Interest rate | Comparison rate | |
|---|---|---|
| What it measures | The cost of borrowing the money | The cost of borrowing the money plus most fees and charges |
| Used to calculate | Your actual repayments | Nothing you pay — it is a comparison tool |
| Two loans at 7.5% | Look identical | Can differ substantially |
| Tells you | What the lender charges on the balance | Roughly what the loan costs once fees are folded in |
Your repayments are calculated from the interest rate, not the comparison rate. The comparison rate is not a rate you are charged — it is a yardstick. That is why two lenders can both advertise the same interest rate while one carries a noticeably higher comparison rate. The gap is the fees.
What a comparison rate includes, and what it leaves out
This is where the regulation is more precise than most explanations. Under the National Consumer Credit Protection Regulations 2010, the fees folded into the calculation are credit fees and charges other than a government fee, charge or duty, and only those that are ascertainable at the time the comparison rate is disclosed (reg 71).
Two consequences follow, and they explain almost every question about why something is not in there:
1. Government charges are excluded by design. Stamp duty and registration-type government charges are not part of the calculation. They are real costs of buying a car — they are just not part of this particular measure.
2. A fee that cannot be known upfront cannot be included. This is the reason the measure can never be complete. A late payment fee, a default fee, or an early termination fee depends on what you do during the loan. Since none of that is ascertainable when the rate is disclosed, none of it is in the number.
Moneysmart lists the common car loan fees a borrower encounters as: an establishment fee (a one-off fee for the administrative cost of setting up the loan), a broker fee (a one-off fee where a broker arranges the finance, which must be disclosed on the finance contract), a dealership or introducer fee (a one-off fee charged by a party who introduces consumers to a lender), and other fees including a monthly service fee, a default or missed payment fee, and extra default interest.
Roughly speaking, the upfront and ongoing fees that are known at the start tend to be in the comparison rate; the conditional ones triggered by your behaviour tend not to be.
Why you keep seeing $30,000 over 5 years
If you have looked at more than one car loan advertisement, you have seen the same example twice: a comparison rate quoted on $30,000 over 5 years. That is not a coincidence, and it is not something lenders invented for consistency.
Australian comparison-rate rules prescribe a set of designated loan amounts and terms. The National Consumer Credit Protection Regulations 2010 (reg 97) list six of them:
| Designated amount | Term |
|---|---|
| $250 | 2 weeks |
| $1,000 | 6 months |
| $2,500 | 2 years |
| $10,000 | 3 years |
| $30,000 | 5 years |
| $150,000 | 25 years |
Source: NCCP Regulations 2010, reg 97, made for subsection 161(2) of the National Credit Code.
For a credit advertisement, the relevant comparison rate is based on whichever prescribed amount-and-term pair most closely represents the typical credit provided for the product being advertised. That is why the pairs sort themselves the way they do in practice:
- $30,000 over 5 years is the pair that best fits most car loans and personal loans — which is why it is the standard example you see across Australian car-finance advertising.
- $150,000 over 25 years is the pair that best fits home loans — which is why home-loan advertising uses that example instead.
- The small, short pairs at the top of the list exist for small-amount and short-term credit products.
It is a prescribed example, not a description of your loan. If you are borrowing $18,000 over three years, the advertised comparison rate was not calculated on your numbers. It is a standardised yardstick that lets you line two lenders up against each other — nothing more.
The number from the same lender would change on a different pair. Because fixed upfront fees spread over the term, a comparison rate on $30,000 over 5 years is not the comparison rate you would get on $8,000 over 2 years.
The limitation that matters most: it only fits its own example
A comparison rate is calculated for a specific amount of credit over a specific term. Change either, and the number changes.
The regulations require the comparison rate to be accompanied by a statement of the amount of credit it is based on and the term (reg 71(7)) — precisely so you can see which example it belongs to. An advertisement carrying a comparison rate must also carry a prescribed warning that it is accurate only for the example given.
Where a credit provider informs you of a comparison rate before you enter a contract, reg 71(11) requires this warning to be given to you in writing:
WARNING: This comparison rate applies only to the example or examples given. Different amounts and terms will result in different comparison rates. Costs such as redraw fees or early repayment fees, and cost savings such as fee waivers, are not included in the comparison rate but may influence the cost of the loan.
That warning is not boilerplate to skim. It is the clearest available statement of the limits of the tool, and it is worth reading as the definition of what a comparison rate is not. Moneysmart puts the practical version simply: make sure you are comparing the same loan amount and term when you look at comparison rates.
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How to actually use a comparison rate
- Compare like with like. Same amount, same term. A comparison rate for $50,000 over seven years and one for $20,000 over three are not comparable figures.
- Treat it as a shortlisting tool, not a decision. It is good at telling you which loans deserve a closer look and poor at telling you which one you should take.
- Then read the fee schedule. The comparison rate compresses the fees into one number; the schedule tells you when you actually pay them, which matters for cash flow.
- Ask about what is excluded. Early repayment and redraw costs are named in the statutory warning as things outside the number. If you might pay the loan out early, that is a real cost the comparison rate is silent on.
- Remember it says nothing about features. Whether extra repayments are allowed, whether there is a balloon, whether the rate is fixed or variable — none of that is in the number. Our repayment calculator is a better way to see the shape of the repayments themselves.
A caution about balloon payments
If a loan has a balloon or residual payment, the comparison rate still only describes the contract as written — including that final lump sum. A smaller monthly repayment achieved by pushing a large amount to the end of the term is not the same thing as a cheaper loan.
Moneysmart makes the general point plainly: the monthly payments look smaller, but the lump sum still has to be repaid with interest, so the total cost of the loan is generally higher.
If you want to see what a balloon does to the numbers rather than to the rate, our balloon payment calculator shows the repayment and the amount still owing at the end side by side. The type of loan matters too — see secured vs unsecured car loans.
Comparison rate FAQs
What is a comparison rate in simple terms?
It is one percentage figure that folds the interest rate of a loan together with most of its fees and charges, so you can compare loans on more than the advertised rate. Moneysmart describes it as a rate that helps you work out the true cost of a loan, including the interest rate and most fees and charges, reduced to a single percentage figure.
Is the comparison rate what I actually pay?
No. Your repayments are worked out from the interest rate. The comparison rate is a comparison tool — it is not applied to your balance and it is not a rate you are charged.
Why is the example always $30,000 over 5 years?
Because it is one of six designated amounts and terms prescribed by regulation (National Consumer Credit Protection Regulations 2010, reg 97): $250 over 2 weeks, $1,000 over 6 months, $2,500 over 2 years, $10,000 over 3 years, $30,000 over 5 years and $150,000 over 25 years. For an advertisement, the relevant comparison rate uses whichever of those pairs most closely represents the typical amount and term for the product being advertised — so car and personal loans generally land on $30,000 over 5 years, while home loans generally use $150,000 over 25 years. It is a prescribed standard example, not a description of your particular loan.
What is not included in a comparison rate?
Government fees, charges and duties are excluded, and so is anything not ascertainable when the rate is disclosed. In practice that means conditional costs — late payment fees, default fees, early repayment and redraw costs — sit outside the number. The statutory warning specifically names redraw and early repayment fees, and fee waivers, as things not included that may still affect what the loan costs you.
Why do lenders show a comparison rate at all?
Because for consumer credit it is a legal requirement. Under the National Credit Code, a credit advertisement that states an annual percentage rate must also contain the relevant comparison rate, with the calculation and the permitted examples prescribed by the National Consumer Credit Protection Regulations 2010. The regulations also require the comparison rate to be shown with the amount of credit and term it is based on, and to carry a warning that it is accurate only for that example.
Is the loan with the lowest comparison rate always the best one?
Not necessarily. The comparison rate is calculated for one amount over one term, and it says nothing about features — extra repayments, early payout terms, a balloon, or whether the rate is fixed or variable. It is an excellent way to narrow a field and a poor way to make the final choice on its own.
Do comparison rates apply to business or commercial loans?
The comparison rate requirements under the National Credit Code apply to consumer credit — credit that is for personal, domestic or household purposes. Lending for business purposes sits outside that regime, which is one reason a business finance quote is presented differently. If you are unsure which applies to your situation, ask before you compare.
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Written and reviewed by the Finance Director at Alpha390
This article is general information only and does not constitute credit or financial advice. It does not take into account your objectives, financial situation or needs. Alpha390 Finance operates under Australian Credit Licence 506065 (Five Tees Pty Ltd). Lending is subject to approval, lending criteria, terms, conditions and fees. Comparison rates are calculated for a particular amount of credit and term and will differ for different amounts and terms.
