If you’ve ever looked at an ad for a loan, you might have noticed that it has two interest rates listed. One is called the comparison rate. It’s crucial to understand what the comparison rate means and how it differs from the other loan interest rate listed.
Read on to find out everything you need to know about car loan comparison rates, including examples and answers to FAQs.
What is a car loan comparison rate?
Comparison rates aren’t specific to car loans, they apply to any personal finance. All lenders are legally required to advertise the comparison rate on their consumer products under Australia’s National Credit Code. The law is designed to stop lenders from confusing consumers by advertising very low interest rates but not letting them know about all their fees.
As the name suggests, the comparison rate is designed to help you compare the total cost of different loans. This includes different finance products from the same lender as well as from other lenders.
Comparison rates are not required on commercial or business loans.
Define comparison rate
The official definition of a comparison rate on the federal government’s ‘moneysmart’ website is below.
“A rate that helps you work out the true cost of a loan. It includes the interest rate, and most fees and charges relating to a loan, reduced to a single percentage figure.”
What does comparison rate mean when buying a car?
The best way to understand a car finance comparison rate is to look at a few examples.
Car finance comparison rate meaning: Example 1
Imagine you need to borrow $20,000 to buy a car. You go online and find and see a loan that has a fixed interest rate of 5% and a comparison rate of 6%.
This means that there are fees of 1% that the lender will charge on top of the 5% interest rate. Those fees are included in the comparison rate. That’s why the comparison rate is always higher than the interest rate, never lower.
If it’s the same as the interest rate, it means that there are no extra lender fees.
The comparison rate allows you to compare different loans because it shows you the total cost of each one. The one with the lowest comparison rate is the best value, as Example 2 below demonstrates.
Car finance comparison rate meaning: Example 2
Let’s continue with Example 1.
You now understand that the real cost of the loan you have found is the comparison rate of 6%, not just the 5% interest.
Imagine that you wanted to compare that loan with another. You find another one that has a variable interest rate of 4.5% and a comparison rate of 7%.
On the surface, the low interest rate of 4.5% looks cheaper than the finance that has a 5% rate. But always remember that it’s the comparison rate that matters. The second loan is 1% dearer when you add in all the lender’s fees.
The table below illustrates how much you will save by choosing the finance with the lower comparison rate (in this case, Loan A) for a $20,000 loan over 5 years with monthly repayments.
| Interest rate | Comparison rate | Total interest and fees payable | |
| Loan A | 5% | 6% | $3,199 |
| Loan B | 4.5% | 7% | $3,761 |
As you can see from this example, Loan A with the lower comparison rate results in you paying $562 less in interest and fees ($3,761 minus $3,199).
Is a higher comparison rate better?
No. A higher comparison rate means that you are paying more lender fees on your finance.
The table below shows your repayments at a 6% comparison rate versus 7% on a $30,000 car loan over 7 years. While 1% mightn’t sound like much, it adds up over time.
| Comparison rate | Monthly repayments | Total repayments |
| 6% | $579.98 | $34,799 |
| 7% | $594.04 | $35,642 |
As you can see, the higher comparison rate results in you paying $843 more for your car over 5 years. That’s money you could spend on other things instead.
Car loan comparison rates Australia
Car finance comparison rates in Australia can vary significantly, depending on the lender and the type of loan. As mentioned earlier, the lower the comparison rate, the better.
One way of getting a low comparison rate is to take out a secured loan. Most car loans in Australia are secured. This means that the vehicle is the security for the finance. The lender can repossess and sell your car if you take out a secured loan and you don’t make your repayments.
The opposite of a secured loan is an unsecured one. This is finance where you don’t provide the vehicle as security. The benefit of that is that there is no risk that the lender can repossess and sell your car. The flip side is that they charge you a higher interest rate to compensate them for the increased risk.
Does the comparison rate include all loan costs?
No, not all costs are included in the comparison rate. Only standard finance costs must legally be included, like loan application or establishment fees, as well as any ongoing fees.
Non-standard costs (like early repayment fees or late payment fees) are not included in the comparison rate. These fees may not necessarily be charged as they are in the control of the borrower.
When you take out a car loan, you should look at all the potential ‘non-standard’ fees a lender could charge you before you decide if the finance is right for you. If you’re confused about finance jargon (like most people), a broker can give you advice.
In addition, any other car buying fees like government stamp duty, rego and insurance costs aren’t included in your comparison rate either. It’s important to factor all those costs into your finance when you’re working out how much to borrow and what sort of vehicle you can afford.
Should you use a comparison rate?
You should always use the comparison rate when comparing different consumer loans. If you don’t, you could end up paying more than you should, as the above tables illustrate.
But the comparison rate isn’t the only thing you need to consider. You also need to make sure your finance will have all the features you need. Those features should include the ability to:
- make extra repayments to pay off your loan faster (ideally, there should be no extra fees for these repayments).
- withdraw any extra payments you make if you need to (this is called a redraw facility).
- set up weekly, fortnightly or monthly direct debit repayments. You should align your repayments with how often you get paid to make budgeting easier.
How is a car loan comparison rate calculated?
Several factors affect a comparison rate calculation on a car loan:
- the interest rate (different types of car finance have different interest rates).
- the standard loan fees charged by the lender (different lenders charge different fees).
- the amount you borrow.
- the finance term (standard car loan terms in Australia range from 1 to 7 years).
- the repayment frequency (in other words, whether you set up weekly, fortnightly or monthly repayments).
Different interest rates on car loans
Lenders charge different rates on different finance products. For example:
- secured loans have lower interest rates than unsecured finance.
A secured loan is one where you use the car as security for the finance.
This lowers the lender’s risk of approving your finance. If you don’t make your repayments, the lender can repossess and sell your vehicle to recover the amount you owe.
An unsecured loan on the other hand is the opposite of a secured loan.
It doesn’t require you to put up your car as security to the lender. This means that the finance is higher risk to the lender, so they charge a higher interest rate.
- fixed versus variable interest rates
Car loans can have either fixed or variable interest rates.
A fixed interest rate stays the same for a set period (which could be for some or all of the finance term). It helps to make budgeting for your repayment easier.
A variable interest rate can move up or down based on market movements. If variable rates increase, your repayments will increase. If they fall, your repayments will drop.
Fixed interest rates can be higher or lower than variable rates. If they are higher, it means that lenders think that market interest rates will rise during the term of the loan.
- your credit score
A credit score is also called a credit rating. Lenders will check your credit score when you apply for car finance.
If you have a good credit score, you’ll be able to get a car loan more easily at a lower interest rate. You’ll have a good credit score if you have a good record of paying all your debts on time.
If you have a bad credit score, you’ll only qualify for finance at a higher interest rate to compensate the lender for the increased risk of approving your finance. They may even reject your application.
You can check your credit score for free online before you apply for finance. If you find that you don’t have a good credit score, you can take steps to improve it before you apply. You should also speak to a car finance broker. A broker will be able to give you advice on which lenders will be most likely to approve your application.
Other car loan and comparison rate FAQS
What if the comparison rate and the interest rate are the same?
This means that the lender isn’t charging you any additional fees over and above the interest rate.
Can the comparison rate ever be lower than the interest rate on a loan?
No, it will always be either higher or at best, the same.
Are balloon payments included in a car loan comparison rate calculation?
No they are not. A balloon payment is a larger final repayment at the end of the loan.
Do lenders have to advertise comparison rates on car leases?
Various types of vehicle leases are available in Australia, including finance leases, operating leases and novated leases. Most of these are considered commercial finance structures and therefore for commercial products a comparison rate is not required.
Can you get a car loan for a used car?
Yes, but not all lenders offer this finance. Talk to a car finance broker to find out which ones do.
Can you get a car loan when buying privately?
Yes.
What is a chattel mortgage?
A chattel mortgage is a secured loan for a business vehicle. If you’re running your own business, you can qualify for a chattel mortgage.
Do I have to take out comprehensive insurance when I get car finance?
Yes, most lenders will require you to take out comprehensive vehicle insurance as a condition of approving your finance. Comprehensive insurance covers damage to your car and others if you’re involved in an accident and it’s your fault. It also covers you for the theft of your vehicle.
Should I take out GAP insurance when I take out a car loan?
GAP insurance covers you if your car is written off in an accident and the amount you receive from your insurer is less than the amount you owe your lender. It’s also called vehicle equity insurance and it’s optional. If you’re borrowing a lot to buy your vehicle, it can give you peace of mind. New cars can drop in value quickly.
How much can I borrow?
This depends on how much you can afford for your regular repayments, which in turn depends on your income and expenses. Do up a budget of your income and regular expenses to work out how much you can afford to repay.
Then talk to a vehicle finance broker who will tell you how much you should be able to borrow.
What will my repayments be?
This depends on:
- how much you borrow (the more you borrow, the higher your repayments will be)
- the comparison rate (the higher the rate, the more your repayments will be)
- the loan term (the longer the term, the lower your repayments will be).
- whether you include a balloon payment. You can lower your repayments if you do, but you need to make sure you can afford the larger repayment at the end.
Again, talk to a finance broker to help you work out your options.
The bottom line
Always use the comparison rate when comparing different car loans. Choose the finance with the lowest comparison rate that has all the features you want.
How we can help
If you’re looking to buy a new or used car and you need finance, talk to our experienced and licensed brokers at Auto Car Loans. We’ll help to find you a great deal and we’ll save you money, as well as all the hassle of doing it yourself.
Whatever you do, don’t get talked into dealer finance at a car yard. If you do, you’ll end up paying more.
We arrange vehicle loans for a living. We work with over 50 Australian lenders, but we work for car buyers, not for car dealers or lenders.
Find out more by calling 1300 301 051 during business hours to speak with one of our expert finance brokers.
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* Low doc finance available up to $100,000 for Commercial use, other conditions may apply. Our promoted finance offers are based on commercial lending. We do also offer personal lending, please discuss your requirements with your personal AutoCarLoans.com.au finance consultant.