The advertised interest rate tells you how interest is charged on a loan. The comparison rate combines that rate with certain fees using a standard loan example. Both are useful, however neither replaces a calculation using the amount and term you are actually considering.
The annual interest rate is applied to the outstanding balance under the loan’s calculation method. A lower rate normally reduces interest when the loan amount, fees and term are otherwise the same. Rates can be fixed or variable, which affects whether repayments may change.
The comparison rate is designed to make some loan costs easier to compare by including the interest rate and certain fees. It can reveal that a low advertised rate is attached to establishment or ongoing costs. Because it uses a prescribed example, it may not reflect your proposed loan amount, term or every fee that applies.
A comparison rate cannot know how much you plan to borrow, whether you will repay early, or which optional and event-based fees you will incur. Two loans with similar comparison rates may also have different terms, security and repayment flexibility.
Write down the advertised rate, comparison rate, fees, term and estimated total amount repaid for each offer. You can then install WeMoney and use the connected view of your debts and regular spending to test those figures against your actual budget. Review your personalised savings opportunities as part of that check, rather than choosing from the advertised rate alone.
Use the interest rate, comparison rate and fee schedule as the starting information. Then calculate the repayment and total amount repaid for your proposed amount and term. Add any cost of paying out the old debts. Compare that result with the remaining cost of your current debts over a similar period.
The most useful figure is the total amount you estimate you will repay, considered alongside a repayment you can afford. A lower total that creates an unmanageable repayment is not workable, and an easy repayment that greatly increases the total deserves a closer look.
It combines the interest rate with certain fees using a standard loan amount and term. This helps compare products on a more consistent basis, particularly where the advertised rate is low but fees are higher.
Government charges, optional features, late fees and costs that depend on borrower behaviour may be excluded. The standard amount and term may also be different from your consolidation loan.
Loan A has a 10.5% interest rate and 11.2% comparison rate. Loan B has a 10.9% rate and 11.0% comparison rate. Loan A’s lower interest rate does not make it automatically cheaper. Use the actual amount, fees and term to calculate each total.
Risk-based products may advertise a rate range. Enter the rate offered or quoted to you, not the lowest rate in the range. Ask whether the quote is indicative and when a formal enquiry occurs.
A monthly account fee may be deducted separately from the loan repayment. Use the full bank-account outflow in the household budget. Add establishment fees to the total even when they are paid upfront.
Read interest rate, comparison rate, fees, term and total amount repaid together. The comparison rate is a screening tool, while the personalised total answers the decision for the actual loan.
Ask each provider for a personalised quote based on the same loan amount and term. Record the offered interest rate, comparison rate, regular repayment, establishment fee, ongoing fees, early-repayment costs and total amount repayable. An advertised starting rate or representative comparison rate is useful for screening, but it may not be the rate used for your application.
Check what sits inside the comparison rate and what remains outside it. The standard calculation includes the interest rate and certain fees using a prescribed loan example. Your amount, term and repayment pattern may be different. Optional features, late-payment costs and some conditional charges may not be reflected. This is why two products with similar comparison rates can still produce different totals for you.
Keep the term fixed during the first comparison. A quote over 7 years should not be placed beside another over 4 years and judged by the repayment alone. Once you know which option costs less over the same period, test the shorter and longer terms that would genuinely fit your budget. This separates product price from the effect of stretching the debt.
Finish with the total amount expected to leave your account from settlement to the final payment. Ask the provider to confirm that figure in writing and note whether it assumes the rate remains unchanged. If the loan is variable, calculate a higher-rate scenario as well. The comparison rate helps you ask better questions, while the personalised repayment schedule shows the commitment you may actually make.
Ask for the repayment schedule as well as the comparison rate. The schedule should show the opening balance, each repayment, fees and the estimated final amount. If the provider cannot supply a useful personalised total, calculate the loan independently before applying. A comparison rate is a screening tool, while the contract figures determine the decision.
Check whether the rate you are viewing is an example, a starting rate or a personalised offer. A comparison rate can be useful, but it is calculated using a prescribed loan amount and term that may not match your consolidation plan. Ask for the actual repayment schedule, total fees and total amount repayable for your proposed amount and term. If two options use different terms, adjust the comparison before drawing a conclusion. A slightly higher rate over a shorter term can still cost less overall than a lower rate stretched across several additional years.
Check rates, fees, repayments, terms and estimated total cost.
Try the calculatorWhy can the comparison rate be higher than the interest rate? It includes certain fees in a standard calculation. Two loans with the same comparison rate can still cost you different amounts when the loan size, term or excluded fees differ. The comparison rate is not personalised, so calculate the proposed loan using your own amount and term.
Ask for the number and frequency of repayments, then add upfront and separately deducted fees. If the provider supplies a total amount repayable, confirm which fees it includes. Compare that figure with the current-debt total from today.
The comparison rate is most useful for narrowing options. The personalised cash-flow and total-cost calculation should decide whether the selected quote improves your position.
Moneysmart: Debt consolidation and refinancing
This article provides general information only. It does not take your personal circumstances into account and is not financial, credit or legal advice. Consider your own situation and seek advice from a suitably qualified professional if you need it.
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