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What is a Car Loan Comparison Rate?

Make a better, clearer, and more informed decision about car loan interest rates by learning about comparison rates.
Published on December 15th, 2020
  Written by 
Thomas Perrotta
Thomas Perrotta is the managing editor of Savvy. Throughout his time at the company, Thomas has specialised in personal finance, namely car, personal and small loans, although he has also written on topics ranging from mortgages to business loans to banking and more. Thomas graduated from the University of Adelaide with a Bachelor of Media, majoring in journalism, and has previously had his work published in The Advertiser.
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   Reviewed by 
Bill Tsouvalas

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Bill Tsouvalas
Bill Tsouvalas is the managing director and a key company spokesperson at Savvy. As a personal finance expert, he often shares his insights on a range of topics, being featured on leading news outlets including News Corp publications such as the Daily Telegraph and Herald Sun, Fairfax Media publications such as the Australian Financial Review, the Seven Network and more. Bill has over 15 years of experience working in the finance industry and founded Savvy in 2010 with a vision to provide affordable and accessible finance options to all Australians. He has built Savvy from a small asset finance brokerage into a financial comparison website which now attracts close to 2 million Aussies per year and was included in the BRW’s Fast 100 in 2015 as one of the fastest-growing companies in the country. He’s passionate about helping Australians make financially savvy decisions and reviews content across the brand to ensure its accuracy. You can follow Bill on LinkedIn.
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A car loan comparison rate is the interest rate of a car loan plus most fees and charges such as account keeping or administration fees, rolled up into one figure and expressed as a percentage per annum (per year). The comparison rate gives a would-be borrower a clearer understanding of how much their loan will cost instead of the base interest rate. The bare interest rate is often used in marketing as it’s usually far lower than the comparison rate on offer. Some lenders and banks advertise interest rates this way to attract customers. Since the comparison rate also includes most fees and charges, this allows you to calculate your budget and get a better estimate of how much you can expect to pay each month in repayments.

How to best use a comparison rate to calculate your repayments

A comparison rate gives you a standard formula so you can compare two (or more) loans side by side and get a complete picture of the cost of a loan. When you have a comparison rate, loan term, and amount you want to borrow, you can calculate your repayments using a car loan calculator. This will give you approximate repayment figures, so you know whether your loan is within your budget.

Let’s look at a $20,000 car loan with a five-year term. Here are two examples with differing rates.

Car Loan Interest Rate Fees Comparison Rate Monthly Repayment
Package A
7.45% p.a.
0.5% p.a.
7.95% p.a.
$405.05
Package B
6.95% p.a.
1.75% p.a.
8.7% p.a.
$412.26

Though Package A has a higher base interest rate, it is more competitive when fees are added in as a comparison rate. All rates and figures here are estimates.

Remember, some car loan comparison rates may be for different loan terms, amounts, and include facilities such as balloon payments. Make sure you are comparing loans that have the same terms and amounts to get a clearer picture of how much you’ll be spending.

Why you should look at comparison rates when budgeting

A comparison rate empowers a consumer or would-be buyer of a car who is looking for car finance to get a complete picture of how much the loan will cost over the loan term. A comparison rate is made up of three ongoing costs:

  • The nominal or base interest rate;
  • Approval, establishment, or other upfront fees, and;
  • Ongoing fees such as account keeping fees.

This is all “rolled up” into one rate, known as the comparison rate. This allows a car loan applicant to compare rates “like for like” instead of guessing the real cost in fees and other charges.

The comparison rate that will determine how much you pay back in interest and fees depends on how much you intend to borrow, the term of the loan, how often you repay the loan (repayment frequency), and the three items above: interest rate, upfront fees, and ongoing charges.

A lender’s comparison rates can also be represented in a comparison rate table or schedule. This schedule details the various rates that apply to the lender’s products for different terms and loan amounts. You can then directly compare these rates to another lender’s rate schedule to determine which rate better suits your situation.

What about features in a car loan?

Comparison rates may not show you how much features of your car loan will cost. This is because many of these features are optional or transactional costs that only apply if you use them. Fees that are used to maintain the loan (administration fees, for example) are counted toward the comparison rate.

For example, some lenders may charge a fee on extra repayments. Others might not. A lender that allows extra repayments may want to charge a fee on paper statements, which is not part of the overall ongoing cost of the loan.

Anything that does not affect the ongoing, “predictable” part of your loan could be considered part of the comparison rate. You’ll have to talk to your lender or broker to ensure what fees are considered transactional and what fees are part and parcel of the overall loan package.

When taking comparison rate car loan products into consideration, you should keep these options in mind. Otherwise you might find nasty surprises trying to access such options.

Secured vs unsecured, fixed vs variable, and comparison rates

Car loans are flexible in that a borrower could choose (depending on their circumstances) a secured or unsecured loan, or fixed or variable interest rates.

A secured car loan is usually cheaper than a comparable unsecured car loan, as the car is used as collateral. Comparing a secured car loan and unsecured car loan, even with a comparison rate, is not an equal match-up.

Comparison rates are better suited to fixed car loans, which most car loan products are. A fixed car loan sets the rate from the beginning and lasts until the end of the loan. A variable car loan rate, even expressed as a comparison rate, is harder to compare like for like. A variable rate may go up and down depending on the market. Some lenders may pass on interest rate cuts; others may not. This makes comparing one variable comparison rate against another troublesome: be wary when looking at variable car loan rates when working out your budget.

Balloon payments and redraw facilities – effect on comparison rates?

Some car loans come with options to reduce regular repayments through reserving a portion of the sum to the end. This is called a balloon payment. A balloon payment or residual value payment is a fraction of the total borrowed, usually between 20% and 50% payable at the end of the loan term. If you borrow $20,000 for a car and opt for a 30% balloon payment, you must pay $6,000 at the end of the loan. This is, in effect, the last instalment to close out the loan.

The comparison rate is not affected by this, as it’s an ongoing cost. You will have to come up with the lump sum at the end of the loan. If you need to finance this with another loan, you may end up paying more in interest.

The same may not apply to a loan with a redraw facility. This allows you to take out money already paid into your loan, like home loan equity (though not the same, as cars depreciate.) These are transactional fees and are usually not included in the comparison rate. Redraw facilities may even extend your loan or how much you pay each instalment, so be careful before considering a redraw facility.

Answering your questions about car loan comparison rates

Why should I use a comparison rate instead of an interest rate?

A comparison rate will give you a like-for-like evaluation of loan products. A comparison rate for a five-year, $20,000 loan with Lender A may have a loan product with a comparison rate of 8.99% p.a., but Lender B, for the same term and amount, may offer an interest rate of 6.59% p.a. These two loans are not the same, as we do not know how much lender B charges in fees. With fees applied, Lender B may charge more than Lender A – which you can tell using a comparison rate.

I have bad credit; can I get a car loan with a comparison rate?

Yes, we can help people with bad credit get a car loan and show you comparison rates, so you always know how much you’ll be paying.

What fees are not included in a comparison rate?

Transactional fees such as early repayment or termination fees, overdue penalties, statement requests, or refinancing fees are usually not included as part of a comparison rate.

How do I get a car loan?

You must apply for finance through our secure online portal. We’ll connect you to one of our dedicated loan consultants who can help you through the process.

What is a repayment frequency?

This is how often you are expected to pay back the loan instalments. You can choose from monthly, fortnightly, and weekly. Choosing fortnightly and weekly instalments can reduce the length of the loan without any additional penalty.

What is my borrowing capacity?

This is how much you can comfortably borrow without falling into financial hardship. This is determined by your current credit history, income, other debts, and financial standing.

Can I have a longer or shorter loan term?

Yes, we can find loan products from as short as 12 months all the way up to 7 years.

What is meant by depreciation?

Depreciation is when an asset loses its value or worth over time. A new car at $20,000 depreciates by 20% when you drive it home. Therefore, the resale value of your car is $18,000. This goes down every year you own the car, as the car is superseded by new models, wear and tear, accident damage, and so on. Some cars, such as vintage or classic cars, may appreciate in value (are worth more over time.)

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This guide provides general information and does not consider your individual needs, finances or objectives. We do not make any recommendation or suggestion about which product is best for you based on your specific situation and we do not compare all companies in the market, or all products offered by all companies. It’s always important to consider whether professional financial, legal or taxation advice is appropriate for you before choosing or purchasing a financial product.

The content on our website is produced by experts in the field of finance and reviewed as part of our editorial guidelines. We endeavour to keep all information across our site updated with accurate information.

Approval for car loans is always subject to our lender’s terms, conditions and qualification criteria. Lenders will undertake a credit check in line with responsible lending obligations to help determine whether you’re in a position to take on the loan you’re applying for.

The interest rate, comparison rate, fees and monthly repayments will depend on factors specific to your profile, such as your financial situation, as well others, such as the loan’s size and your chosen repayment term. Costs such as broker fees, redraw fees or early repayment fees, and cost savings such as fee waivers, aren’t included in the comparison rate but may influence the cost of the loan. Different terms, fees or other loan amounts may result in a different comparison rate.

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