Advertised Rate vs Comparison Rate:

When shopping for loans, particularly home loans, consumers often encounter two key figures: the advertised (headline) interest rate and the comparison rate. Although both relate to the cost of borrowing, they serve different purposes and can vary significantly. This article provides an in-depth exploration of advertised rates versus comparison rates, explaining their definitions, calculation methods, regulatory requirements, and practical implications. It also examines why banks may advertise low headline rates with higher comparison rates or vice versa, discusses the impact of loan features on these rates, and offers actionable guidance for consumers and educators.

The advertised interest rate (or headline rate) is the nominal rate lenders promote in marketing materials. It represents the basic cost of borrowing, expressed as an annual percentage rate (APR), but does not include fees or charges.

In contrast, the comparison rate aims to give consumers a more holistic view of the true cost of credit by combining the interest rate with most associated fees and charges over the loan term. It is expressed as a single percentage that reflects the total cost of the loan annually, assuming a specific loan amount and loan term.

In Australia, the comparison rate calculation is standardised under the National Credit Code (NCC) and related regulations. The calculation assumes:

• A fixed loan amount and term (usually $150,000 over 25 years for home loans)
• Inclusion of the nominal interest rate plus most fees and charges payable over the life of the loan
• Exclusion of certain fees such as government charges and conditional fees (e.g., early repayment fees)

For example, a lender might advertise a nominal interest rate of 5.49%, but the comparison rate could be higher, say 5.75%, reflecting added ongoing fees and charges.

The comparison rate thus serves as a standardised metric enabling consumers to compare the real cost of different loan products more effectively.

Included fees and charges:

Excluded fees and charges:

This approach balances comprehensiveness with practicality, ensuring the comparison rate reflects typical costs without being skewed by occasional fees.

Including most fees improves transparency, helping consumers avoid loans with deceptively low advertised rates but high hidden fees. However, because some fees are excluded, consumers should still review product disclosure statements to understand all potential costs.

Example:

• Loan amount: $150,000
• Term: 25 years
• Nominal interest rate: 5%
• Application fee: $1,000
• Monthly service fee: $10

The comparison rate calculation spreads fees over the loan term and adds them to the interest cost, resulting in, for instance, a 5.5% comparison rate. This shows the loan is effectively more expensive than the headline rate suggests.

Comparison rates differ markedly between loan types due to variations in interest rates, fees, loan terms, and risk profiles.

Banks’ advertising strategies reflect market positioning and regulatory constraints:

• Low headline rate + higher comparison rate: Attracts attention with an appealing rate, while disclosure of the higher comparison rate ensures compliance. This may indicate higher fees or loan features that increase total cost.
• Higher headline rate + lower comparison rate: Suggests fewer fees or simpler loan features. Appeals to informed consumers focusing on total cost rather than the nominal rate.

Banks balance competitiveness, consumer psychology, and regulatory obligations to optimise marketing impact while avoiding misleading claims.

Effect of Fixed vs Variable interest rates on comparison rates

The type of interest rate significantly influences the calculation and practical usefulness of comparison rates.

• Fixed interest rate loans have a locked-in rate for the term, making comparison rates more stable and predictive of total cost.
• Variable interest rate loans fluctuate with market conditions and central bank rates, causing monthly repayments and total costs to vary over time.

Because comparison rates assume a constant rate over the loan term, they may understate or overstate actual costs for variable rate loans, limiting their predictive value.

Influence of loan features like offset accounts and redraw facilities

Loan features that offer repayment flexibility or interest savings often are not fully accounted for in comparison rates.

Since comparison rates do not capture these dynamic features and benefits, they may overstate the cost of loans with such facilities. Borrowers who actively use these features may find the comparison rate less reflective of their true loan cost.

While comparison rates improve transparency, they have limitations:

Consumers should use comparison rates as a starting point but also consider personal circumstances, loan features, and full disclosure documents when comparing loans.

In Australia, disclosure of advertised and comparison rates is governed chiefly by:

• National Consumer Credit Protection Act 2009 (National Credit Act), especially Part 10 of the National Credit Code, mandating inclusion of comparison rates in advertisements for fixed-term loans aimed at personal/domestic use.
• ASIC’s Regulatory Guide 234 (RG 234) provides best practice guidance for advertising financial products, requiring clear, truthful, and not misleading disclosure of both rates, including mandatory warnings on comparison rates.
• The Australian Competition and Consumer Commission (ACCC) enforces advertising standards under Australian Consumer Law against misleading conduct and deceptive advertising.

Recent years have seen increased regulatory scrutiny to enhance transparency and consumer protection:

• ASIC has updated regulatory guides and intensified enforcement against misleading advertising.
• The ACCC has issued infringement notices against banks for inaccurate disclosures to improve data quality.
• New guidance under the Delivering Better Financial Outcomes Act 2024 encourages clearer disclosures, including flagging deferred fees.

These steps have pushed lenders to prominently display comparison rates alongside advertised rates, reducing consumer confusion and improving market fairness [12][13].

ASIC mandates:

• Calculation of comparison rates per the National Credit Code methodology, including interest plus most fees over the loan term.
• Accompaniment of the comparison rate with a clear warning stating it is indicative only and specific to the example advertised.
• Prominent, legible display of comparison rates alongside headline rates in all advertisements.
• Exclusion of certain fees (government, early repayment) from the calculation but disclosure of those fees elsewhere.

These rules ensure consistency, prevent consumer misunderstanding, and promote informed decision-making.

Banks often advertise low headline rates paired with higher comparison rates for strategic reasons:

• The low headline rate captures consumer attention and generates inquiries due to its psychological appeal.
• The comparison rate, which includes fees, ensures regulatory compliance and transparency.
• This dual approach balances aggressive marketing with ethical responsibility, building long-term trust and avoiding regulatory penalties.

Some lenders may also advertise higher headline rates with lower comparison rates when fees are minimal, appealing to savvy consumers who focus on total costs.

Regulatory guidelines and industry best practices recommend:

• Prominent, bold display of the headline interest rate to attract initial attention.
• Clear, legible, but subordinate placement of the comparison rate alongside with mandated warnings.
• Avoidance of hiding or obscuring comparison rates in fine print.
• Use of plain language and transparent fee disclosures.
• Consistency across all marketing channels to reduce consumer confusion.

While regulations have improved transparency, challenges remain:

• Practices like drip pricing (adding fees later) can mislead consumers.
• Vulnerable consumers, including non-English speakers, still face difficulties understanding rates.
• Enforcement actions and consumer education are ongoing to address these gaps.

Overall, current practices provide a solid foundation but require continuous vigilance and enhanced communication efforts.

Studies show:

• Many consumers anchor on the headline rate and overlook comparison rates.
• Vulnerable groups (younger people, females, non-English speakers) have lower comprehension and face more financial difficulties.
• Consumers often do not fully appreciate the impact of fees and loan features on total cost.

Regulators and consumer groups employ:

• Plain language educational materials explaining comparison rates.
• Enforcement actions to ensure truthful advertising.
• Tailored messaging and outreach to vulnerable demographics.
• Tools like calculators and interactive guides on platforms such as ASIC’s MoneySmart.

Data-driven personalisation and behavioural insights help:

• Tailor messages to demographic-specific cognitive biases.
• Use natural language processing to analyse and optimise messaging.
• Highlight total loan costs clearly, avoiding jargon.
• Reinforce the importance of comparison rates in decision-making.

The comparison rate combines the nominal interest rate with most fees and charges payable over the loan term, assuming a fixed loan amount and term (usually $150,000 over 25 years). It excludes government fees and conditional fees like early repayment charges. The result is an annual percentage reflecting the true cost of the loan.

Fixed loans have stable rates making comparison rates more predictive. Variable loans fluctuate, so comparison rates may not reflect future costs. Offset accounts and redraw facilities reduce interest payable but are not factored into comparison rates, potentially overstating loan costs.

Under the National Credit Code and ASIC’s RG 234, lenders must disclose comparison rates alongside advertised rates in fixed-term loan advertisements. Comparison rates must be calculated per prescribed methods and include warnings about their indicative nature.

Advertising a low headline rate captures consumer interest, while the higher comparison rate reflects fees and charges, ensuring transparency and compliance. This strategy balances marketing appeal with regulatory requirements.