A comparison rate is a statutory attempt to stop lenders advertising a seductive interest rate while parking the real cost in fees. Under the National Credit Code, a credit provider that advertises an interest rate for a consumer credit contract is generally required to advertise a comparison rate as well. The figure is a single percentage. It is not your repayment schedule, and it is not a quote.
This publication is not an Australian credit licensee and does not give credit assistance. A comparison rate cannot tell you which contract to sign. It can tell you when an advertisement is incomplete.
What the law is trying to do
The National Credit Code sits as Schedule 1 to the National Consumer Credit Protection Act 2009. The comparison-rate rules live in that Code and in the regulations made under the NCCP Act. The policy is older than the current statute: if the public is shown an interest rate, it should also be shown a rate that folds in the fees a typical borrower cannot avoid.
ASIC polices the advertising. Moneysmart is the plain-English version of the same idea. The comparison rate is a disclosure tool, not a ranking. Brokers and other intermediaries who engage in credit assistance still have to be licensed or authorised. Responsible lending obligations were scaled back for many — not all — credit products in the 2020s. Comparison-rate advertising did not disappear with that change.
The standard assumptions
A comparison rate is not calculated on your amount and your term unless the advertisement is built that way. The regulations prescribe standard amounts and terms so that two advertisements can be held next to each other. In ordinary consumer advertising those standards are the ones Moneysmart repeats: a home-loan comparison rate on $150,000 over 25 years; a personal-loan or car-loan comparison rate on $30,000 over five years.
Those numbers are bureaucratic conventions. They are not a typical Sydney home loan, and they are not a typical used-car contract at a suburban dealer. A $600,000 mortgage advertised with a comparison rate built on $150,000 is using the legal yardstick, not your balance. A $12,000 unsecured loan advertised with a comparison rate built on $30,000 over five years is doing the same thing in the other direction.
If the advertisement specifies a different amount or term, the comparison rate should follow that specification. Many do not specify. They show the standard figure because the regulations let them, and because a five-year personal-loan assumption often makes an establishment fee look milder than a two-year assumption would. The arithmetic is specified. The inputs are not your contract.
What the figure includes
In broad terms, the comparison rate takes the interest rate and the fees and charges that are known, payable by those who enter the contract, and not dependent on how the borrower behaves. Establishment fees, monthly or annual account fees, and similar unavoidable costs of the credit are the core.
The result is expressed as a nominal percentage per annum, so that it can sit next to the advertised interest rate. A loan at 8.99 per cent with a $400 establishment fee and a $10 monthly fee will produce a comparison rate above 8.99 per cent. How far above depends on the standard amount and term. On a $30,000 five-year assumption, a few hundred dollars of fees move the percentage modestly. On a $5,000 eighteen-month loan, the same fees move it a lot — but the advertisement may still be showing the five-year, $30,000 figure.
That is why two products with the same advertised interest rate can have different comparison rates, and why the gap is not a complete ranking. The comparison rate answers a regulated question: if we assume this amount, this term, and these known fees, what single rate is equivalent? It is not answering what the contract will cost you.
What the figure omits
The omissions are the part lenders do not put in the same point size.
Government charges — stamp duty on a mortgage, registration fees, some state charges on security interests — sit outside the comparison rate. On a home loan those amounts can dwarf a monthly account fee. On a car loan, registration and transfer are not “credit fees” even when the dealer helpfully adds them to the amount financed.
Fees that depend on your behaviour are out. Late-payment fees, dishonour fees, redraw fees that apply only if you redraw, extra-repayment fees that apply only if you pay extra, and default interest are not baked into the advertised comparison rate. They are still in the contract.
Optional extras are out. Loan protection insurance, gap insurance, extended warranties, and other add-ons that you can theoretically decline do not have to be in the comparison rate. In dealer channels they are often not theoretical. They are ticked, capitalised, and interest-bearing. The comparison rate on the finance product can look clean while the amount financed has grown by several thousand dollars. Car finance through a dealer, a bank or a broker is where this pattern is most visible.
Break costs on a fixed-rate contract are typically out. Paying out a fixed home loan or a fixed personal loan early can generate a break-cost figure that no comparison rate was asked to predict.
Commission paid by the lender to an introducer is a cost of distribution. It is not always a fee “relating to the credit contract” in the comparison-rate sense, even though it can influence the rate you are offered.
The comparison rate also says nothing about serviceability, security, or what happens if you use an offset or make extra repayments. Those mechanisms change interest more than a 0.1 percentage-point gap on a billboard. See home-loan LVR, LMI, offset and redraw and secured versus unsecured personal loans.
Short loans, odd terms, and other ways the filter bends
The standard five-year personal-loan assumption is unkind to anyone trying to read a two-year contract, and too kind to anyone trying to read a one-year contract with a fat establishment fee. Annualise a $600 fee over five years on $30,000 and it is a rounding error. Annualise the same fee over twelve months on $8,000 and it is the product.
Introductory rates create a second distortion. A comparison rate is supposed to reflect the known pricing of the contract, not the honeymoon alone. Advertisements that lead with a six-month discount and bury the revert rate are the behaviour the rule was written to constrain. Read both numbers. If only one number is in large type, that is the advertisement working as designed.
Loans with a balloon or residual — common in car finance — produce low monthly figures and a large final payment. A comparison rate on a standard fully-amortising assumption does not automatically make that structure visible. The contract will say whether a balloon exists. The banner often will not.
Small amount credit contracts sit in their own cage. The classic statutory cap is a 20 per cent establishment fee plus 4 per cent per month of the amount advanced, with further limits on refinancing and on how much of income can be taken. A comparison rate on a SACC can print as a startling percentage because the fees are large relative to a short term. That percentage is less useful than reading the cap and the term. We cover that market in payday loans and SACCs. Do not invent a different cap from a comparison-rate graphic.
Credit cards are a poor fit for a loan-style comparison rate, because revolving credit does not have a single drawdown and a single term. Card cost is dominated by residual interest, cash-advance pricing, and whether the balance is actually cleared in the interest-free period. That arithmetic is how credit-card interest is calculated, not a five-year, $30,000 personal-loan assumption.
Using the number as a filter
A comparison rate is good at one job: catching the advertisement that says 6.99 per cent and means 6.99 per cent plus a $1,200 establishment fee plus $15 a month. If two consumer personal loans are for similar amounts and similar terms, and one comparison rate is far above the other, you have a reason to open both fee tables before you open either application.
It is a bad verdict. It does not know whether you will pay the loan out in ten months. It does not know whether the dealer will add a warranty. It does not know whether the home-loan comparison rate was built on $150,000 when you are borrowing $740,000 at 90 per cent LVR with lenders mortgage insurance capitalised. It does not know whether a “low comparison rate” secured loan is cheap because you pledged a car you cannot afford to lose.
A practical reading order is: note the comparison rate and the assumptions printed next to it; open the fee table and the payout rules; check whether the amount and term you actually want are close to the assumption; check what is optional on the page and compulsory in the office.
If the product is not consumer credit — a business-purpose facility, some commercial hire, some novated arrangements — the comparison-rate rule may not apply. The absence of a comparison rate is a regulatory fact, not proof of cheapness.
AFCA can hear disputes about credit contracts and credit assistance. ASIC can act on advertising. Neither will rerun a comparison rate for your household. If the problem is already repayment, the National Debt Helpline is 1800 007 007. If the problem is still which advertisement is less incomplete, the comparison rate is a filter. The contract is the verdict, and this publication will not enter it for you.