What Is a Comparison Rate? The Real Cost of a Personal Loan, Explained

A comparison rate bundles a loan's interest rate together with most of its fees into a single annual percentage, worked out on a standard $30,000 loan over 5 years. It exists because two loans with the same advertised interest rate can cost noticeably different amounts once fees are added — the comparison rate is the number built to expose that difference, and by law it has to sit alongside any advertised interest rate.

Why the advertised rate isn't the full story

`Interest rate` — the percentage charged on the amount you borrow — is only one part of what a loan costs. Most personal loans also carry an establishment fee (a one-off charge for setting up the loan) and sometimes a monthly or annual account-keeping fee. A loan advertised at a lower interest rate than a competitor can still end up costing more once those fees are factored in.

Comparison rates exist specifically to close that gap. Under Australian law, any lender advertising an interest rate on a personal loan alongside a specific fee structure must also display a comparison rate calculated the same way every other lender calculates theirs — so the number on one lender's website means the same thing as the number on another's.

How the comparison rate is actually calculated

`Comparison rate` — the interest rate plus most fees, expressed as a single annual percentage — is worked out on a standard loan of $30,000 over 5 years. That standard amount and term isn't chosen by the lender advertising the rate; it's set so every comparison rate in the market is calculated on the same hypothetical loan, which is what makes comparing them meaningful.

This matters more than it sounds. If your actual loan is $10,000 over 3 years, the comparison rate you're looking at wasn't calculated on your numbers — it was calculated on $30,000 over 5 years, and then presented as a rate. It's still useful for comparing lenders, but it isn't a preview of your own repayment figure. That's what the T1 calculator is for — plug in your actual loan amount and term to see what you'd pay.

What's included

• The interest rate itself
• The establishment or application fee
• Ongoing monthly or annual fees, if the loan has them
• Any other fee that applies to every borrower on that product, regardless of their situation

What's left out

• Government charges and statutory fees
• Fees that only apply in specific circumstances — an early exit fee, a late payment fee, a redraw fee
• Fees for optional extras you choose to add, like payment protection insurance

The exclusions matter because they're not small. An early exit fee, if you ever refinance or pay the loan out ahead of schedule, isn't reflected in the comparison rate at all — it only applies if you actually trigger it.

Why the standard loan size matters more the further your loan is from it

The $30,000-over-5-years benchmark is where a comparison rate is most accurate as a predictor of your real cost, and least accurate the further your actual loan drifts from it. A flat establishment fee spread over a $30,000 loan barely moves the annual percentage; that same fee spread over a $3,000 loan moves it far more, because there's less principal to spread the fixed cost across. This is why a comparison rate is a genuinely reliable way to rank lenders against each other, but a less reliable prediction of your exact repayment the smaller or shorter your real loan is.

A worked example

Two lenders are both advertising a $15,000 personal loan over 5 years.

Lender A: advertised interest rate 10.99%, $250 establishment fee, no ongoing fees. Comparison rate: roughly 11.4%.

Lender B: advertised interest rate 10.49%, $450 establishment fee, plus a $10 monthly account fee. Comparison rate: roughly 11.75%.

Lender B has the lower advertised interest rate — the number most people notice first. But once the fees are folded in, Lender B is actually the more expensive loan over the life of the comparison term. Without the comparison rate, that wouldn't be obvious from the advertised numbers alone.

A second example — a small loan where the fee dominates

Take a $5,000 loan over 2 years. Lender C advertises 12% interest with a $395 establishment fee and no ongoing fees. On a loan this size and this short a term, that fixed $395 fee is a much bigger share of the total cost than the same fee would be on a $30,000, 5-year loan — which is why the resulting comparison rate can sit noticeably above the advertised interest rate, sometimes by more than a full percentage point. Smaller, shorter loans are exactly where checking the comparison rate — rather than just the headline interest rate — makes the biggest practical difference.

Where this fits with LoanClarify's tools

LoanClarify's calculators don't quote comparison rates, because a comparison rate belongs to a specific lender's specific product — not to a general estimate. What the T1 Loan Repayment Calculator gives you instead is an interest rate range based on your credit score and whether you own your home, so you know roughly where you sit before you're looking at real offers.

Once you have an actual offer in hand, the comparison rate on it is the number worth reading carefully — not just the headline interest rate. If two offers have similar interest rates but noticeably different comparison rates, the fee structure is where the difference is hiding.