When you’re shopping around for a loan, whether it’s a personal loan or a home loan, there’s a lot or information to take in. Two of the main factors to look out for are the interest rate and the comparison rate. Knowing the difference between the two means that making a fully informed decision is that bit easier.
So, what is the difference?
Interest is normally the biggest (but not the only) cost of taking out a loan. It’s essentially a fee charged by the lender to the borrower in return for giving them a loan. The interest on a loan is usually shown as a percentage of the loan amount and the rate charged will depend on various factors, including but not limited to:
- The purpose of the loan
- Whether the interest rate is fixed or variable
- The Reserve Bank of Australia’s cash rate
- Regulatory requirements
- Market conditions
The comparison rate is designed to let you easily compare the true cost of one loan versus another. It’s calculated by combining the loan’s interest rate with other costs and fees involved. Like the interest rate, it is shown as a percentage of the amount being borrowed. On top of the interest rate, a loan’s comparison rate will factor in things like:
- Any establishment fee that’s charged when you take out the loan
- Ongoing fees you might pay throughout the life of the loan
- The amount being borrowed
- The duration of the loan (how long it will be paid back over)
It’s always worth bearing in mind that the advertised comparison rate for a loan will be based on a sample set of criteria. It’s designed as a guide for those considering a loan. The actual comparison rate on your loan may be different depending on your specific circumstances.
What the comparison rate doesn’t include
While the comparison rate gives a truer picture of the cost of borrowing than the interest rate, there are other things to consider.
Depending on what the loan is for, there may be other costs associated with your purchase. For example, if it’s a home loan, the comparison rate won’t take government charges like stamp duty into account.
Some loans feature optional extras that carry a fee but won’t be included in the standard comparison rate. Examples include early payout fees or redraw fees which some lenders may charge (many CUA loans don’t carry these fees).
Potential cost savings like fee waivers or offset account options (where you can pay less interest on your loan by depositing money in a connected savings account) may also not be factored into the comparison rate.
Important information: Please note that this is only intended as a general guide in relation to issues you may want to consider when borrowing money. It is not intended to be an exhaustive list of all relevant issues and you should take into account your own particular circumstances, and obtain independent expert advice where needed, before proceeding.