Headline vs Comparison Rates – What’s the Difference?

When taking out a loan, be it a personal loan, mortgage or debt consolidation, we tend to focus on two numbers – the amount we’re borrowing and the interest rate we’ll be paying. But there are a few other figures you need to factor in. These include:

• Fees associated with setting up the loan

• Ongoing charges such as account keeping or annual fees

When you're looking for the best option for your situation, there's a lot you need to consider. This is where comparison rates come in handy.

A comparison rate represents the true cost of the loan. Sometimes referred to as Average Annual Percentage Rates (AAPR), they factor in your interest rate, fees, loan term, payment frequency and total borrowed amount. As the name suggests, they’re very useful for comparing products from various credit providers. 

Basically, because the Government told them so. The Australian Securities & Investments Commission (ASIC, for short) looks after the country’s consumer credit regime. The National Credit Code stipulates that all lenders must provide a comparison rate alongside their headline interest rate to ensure customers understand what they’re really signing up for.

The headline rate (also known as the advertised rate) represents just one piece of the puzzle. When comparing products, it’s the first thing you look at, so lenders always aim to put their best rate forward. But you need to zoom out and take in the whole picture.

If you had three loan offers in front of you, your instinct would be to choose the one with the lowest interest rate, right? But what happens if that option has the highest ongoing monthly fees? You might end up paying way more in the long run. Comparison rates will give you a better indication of what you’ll actually be paying over the life on the loan.

To calculate a comparison rate, we need to factor in any fees at the beginning (establishment fee), middle (monthly/annual fees) and end (early exit fees). For a fair comparison, the loan amount, loan term and repayment frequency must be equal. The example below compares three products offering a $30,000 unsecured loan, fixed over five years with monthly repayments.

They shouldn’t be hard to find. Lenders are legally required to display the comparison rate alongside the advertised rate. As a bonus, lenders also need to provide a comparison warning statement that outlines the accuracy of the comparison rate.

You might find the comparison rate listed on a fact sheet or in a table of information about the loan product you’re looking at. The easiest way to find them is through a comparison website – you’ll find plenty with a quick Google search.