You are comparing two personal loans. One advertises the lower interest rate. The other advertises the lower comparison rate. The two numbers disagree, and the disagreement is the useful part.
This guide explains what goes into a comparison rate, why the number is still only a starting point, and how to put it next to the fee list so you can judge which loan actually costs less for the amount you want to borrow and the time you want to take to repay it.
What a comparison rate is for
A personal loan is money you borrow for a specific purpose — MoneySmart (moneysmart.gov.au) describes common uses as a car, a holiday or home improvements — and repay with interest over an agreed term.
The headline interest rate tells you the price of the money only. It says nothing about the establishment fee, a monthly or annual service fee, or other charges that apply to the loan. A comparison rate folds those known fees into a single annual percentage figure, so the two loans are measured on the same basis.
That is the whole point of it: one number that reflects interest plus the charges the lender can predict, rather than interest alone.
Interpretation: if Loan A has a lower interest rate but a higher comparison rate than Loan B, the gap is telling you Loan A carries more in fees across the standard example used to calculate it. That is the moment to look at the fee list rather than the headline rate.
What sits inside the number — and what does not
Inside the comparison rate, you should expect:
- the interest rate applied to the loan
- fees and charges the lender knows you will pay, such as an establishment or application fee and any ongoing account-keeping or service fee
- the effect of compounding those amounts across the standard loan example
Outside the comparison rate, you should expect:
- fees that only apply if something happens, such as a late payment fee, a dishonour fee, or a charge for paying out a fixed-rate loan early
- fees that vary with how you use the loan, for example redraw or additional repayment charges
- any costs outside the loan contract itself, such as lender's mortgage insurance (on a secured loan), registration or valuation costs, or insurance products offered alongside the loan
MoneySmart notes that fixed rate loans may charge a fee if you repay the loan early. That matters here: an early-payout fee is a real cost, but it is conditional on your behaviour, so you should not assume it is reflected in the advertised comparison rate. Check it directly.
Verify: the loan contract and key facts sheet list every fee by name and amount. Where the contract and the advertised comparison rate disagree about what is included, the contract governs.
Why the comparison rate can still mislead you
MoneySmart is explicit about the main limitation: comparison rates vary depending on the loan terms and are only accurate for the example given.
In practice that produces four problems.
1. The example is not your loan. By law the comparison rate is calculated on a standard example — a set loan amount over a set term — not on the amount you plan to borrow or the term you want. A fee that is small in percentage terms on a large, long loan can be a much larger share of the cost on a small, short one, and vice versa.
2. Your term changes the answer. If you intend to repay faster than the standard example, upfront fees dominate your real cost. If you intend to take longer, the interest rate dominates. The comparison rate cannot know which borrower you are.
3. Fixed and variable are not the same product. A fixed rate gives you certainty over a set period; a variable rate can move. A comparison rate calculated today on a variable loan assumes the current rate holds. Treat that as an assumption, not a forecast.
4. Secured and unsecured loans are priced differently. A loan secured against an asset usually carries different pricing and different accompanying costs from an unsecured loan, and those differences may not be fully visible in a single annual percentage.
Using the comparison rate alongside the fee list
The comparison rate ranks loans. The fee list tells you what you are actually signing. Use them together, in this order.
| Step | What to do | What it tells you |
|---|---|---|
| 1 | Shortlist by comparison rate | Which loans are cheapest on the standard example |
| 2 | Read every fee in the contract | Which costs are conditional, and how large they can get |
| 3 | Price the loan on your amount and term | Your actual total cost, not the advertised one |
| 4 | Check early repayment terms | Whether paying the loan out early costs you money |
| 5 | Confirm repayment frequency and flexibility | Whether you can pay extra, and at what cost |
MoneySmart provides a personal loan calculator to estimate repayments and compare how different loans affect the total cost. Run your real numbers — your amount, your term, your repayment frequency — rather than relying on the advertised example.
A quick illustration
Suppose two loans both advertise a comparison rate, and the gap between them comes from a loan with a low interest rate and a meaningful monthly fee. On a short, small loan, the monthly fee does most of the damage. On a larger, longer loan, the interest rate does. The comparison rate gives you one view of that trade-off; your own numbers give you the right one. Figures here are illustrative only and are not an offer or a quote from any lender.
Questions worth asking before you apply
Ask the lender or broker, and get the answers in writing:
- What is the total amount I will pay over the full term, for the exact amount and term I want?
- What fees apply if I pay the loan out early, and how is that fee calculated?
- Can I make extra repayments, and is there a cap or a charge?
- Does the interest rate move during the term, and if so, how often and on what basis?
- What happens if I miss a repayment?
- Is the loan secured, and if so, against what?
- Are there any fees charged at settlement that are not in the advertised comparison rate?
MoneySmart also flags that some people use a personal loan to consolidate debt. If that is your reason for borrowing, the comparison rate is a weaker guide than usual, because the relevant question is whether the new loan costs less in total than what you are paying now across the remaining term of your existing debts — including any break costs on those debts.
Your next step
Write down three things before you compare anything: how much you need to borrow, how long you realistically need to repay it, and whether you might pay it out early. Then shortlist loans by comparison rate, read the fee list on each one, and run your own figures through a repayment calculator.
If you want a starting point for what is available for your situation, our matching tool can help you see which loan types fit your circumstances. It is a starting point, not a recommendation — the contract and its fee list are what you should decide on.
The comparison rate is the best single number lenders are required to give you. It is not the answer to "what will this loan cost me". The fee list, your term, and your repayment behaviour are the rest of the answer.
General information only
This article is general information about how comparison rates work in Australia. It is not legal, tax, credit or financial advice, and it does not take into account your objectives, financial situation or needs. Rules about what must be disclosed, and how comparison rates are calculated, can change, and lenders' fees and terms differ from product to product. Nothing here promises approval, a rate, a saving or any particular outcome. Confirm all figures, fees and contract terms with the lender directly and read the contract before you sign. If you are unsure whether a loan suits your circumstances, speak to a licensed financial adviser or a free financial counsellor.