Comparison rate vs headline rate: what you actually pay

A lender advertises 6.99% and it looks unbeatable. Then the paperwork arrives with an establishment fee, a monthly service charge and a line fee — and the real cost is closer to 9%. Understanding the difference between the headline rate and the comparison rate is the single most useful skill when you're shopping for a business loan.

The headline rate is the hook

The headline rate — sometimes called the advertised or nominal rate — is the interest rate a lender leads with. It's the big number on the billboard. What it deliberately leaves out is every other cost attached to the facility: establishment or setup fees, monthly or annual account-keeping fees, drawdown fees on a line of credit, and early-repayment charges.

None of these are hidden in a legal sense — they're all disclosed somewhere in the contract. But because they sit outside the headline number, two loans advertised at the same rate can cost very different amounts once they're running.

The comparison rate tells the truth

The comparison rate rolls the interest rate and the standard fees into a single percentage, so you can line up two products and compare like for like. For consumer lending in Australia it's a regulated figure; for business lending it's less standardised, which is exactly why it pays to ask for it — or to calculate the effective cost yourself.

A worked example

Say you're borrowing $100,000 over three years. Two lenders quote you what looks like a similar deal:

Lender A wins the billboard but loses the deal. Once you fold in the establishment fee and the monthly charges, its effective cost climbs above the lender that advertised a higher rate with no fees. This flip happens constantly — and it's why the lowest headline rate is so often the wrong choice.

Where the fees hide

• Establishment / setup fees — a one-off charge, sometimes a flat dollar amount, sometimes a percentage of the loan. On short terms this hurts the most, because you have fewer months to spread it across.
• Service or account-keeping fees — small monthly amounts that quietly add up over the life of the facility.
• Line fees — on a line of credit or overdraft, you can be charged on the full limit even when you haven't drawn it.
• Early-repayment or break fees — if you plan to pay the loan out early, these can wipe out the interest you'd hoped to save.

How to compare properly

1. Ask every lender for the total cost in dollars over the exact term and amount you want — not just the rate.
2. Match the term. A 12-month and a 36-month facility at the same rate are not comparable; spread the fees across the real term.
3. Separate one-off fees from ongoing fees so you can see what a shorter or longer term does to the maths.
4. For revolving products, ask whether fees apply to the limit or only to funds drawn.

Doing this by hand across a dozen lenders is tedious, which is the whole reason comparison tools exist. When every product is normalised to the same amount, term and fee basis, the genuinely cheapest option is obvious — and it's frequently not the one with the lowest advertised rate.