{"menuItems":[{"label":"What are interest rates?","anchorName":"#what-are-interest-rates"},{"label":"What does p.a. mean?","anchorName":"#what-does-p-a-mean"},{"label":"Why is the annual interest rate important?","anchorName":"#why-is-the-annual-interest-rate-important"},{"label":"How is interest calculated?","anchorName":"#how-is-interest-calculated"},{"label":"Why do you pay interest?","anchorName":"#why-do-you-pay-interest"},{"label":"Is it better to have a higher or a lower interest rate?","anchorName":"#is-it-better-to-have-a-higher-or-a-lower-interest-rate"},{"label":"What is the comparison rate?","anchorName":"#what-is-the-comparison-rate"},{"label":"What is considered a high interest rate?","anchorName":"#what-is-considered-a-high-interest-rate"},{"label":"What to weigh up: The pros and cons of a low interest rate","anchorName":"#what-to-weigh-up-the-pros-and-cons-of-a-low-interest-rate"},{"label":"What are the different types of interest rates?","anchorName":"#what-are-the-different-types-of-interest-rates"},{"label":"How is interest charged on different financial products?","anchorName":"#how-is-interest-charged-on-different-financial-products"},{"label":"How should you compare interest rates?","anchorName":"#how-should-you-compare-interest-rates"},{"label":"Compare interest rates across loans, credit cards and savings accounts","anchorName":"#compare-interest-rates-across-loans-credit-cards-and-savings-accounts"}]}
A number of financial products, such as personal loans, home loans, credit cards and savings accounts, come with interest rates. Some types of interest cost you money, while you can earn from others. For instance, your savings account interest rate will earn you money, whereas interest on your credit card will cost you. Interest rates can be structured and charged depending on the lender and the product. It's important to know how interest rates work, so you know how to compare products and find the right one for you.
What are interest rates?
Interest rates are a percentage of a principal sum of money that is lent, borrowed or deposited. If you borrow money, you will usually pay interest on the money that you borrow. For money that is deposited (e.g. into a savings account or term deposit) or lent by you, you will earn interest on the principal sum.
There are two types of interest: simple and compound.
Simple interest. This is calculated on the principal sum, or original amount, of a loan or savings/deposit. This form of interest is cheaper if you are paying it down on a loan.
Compound interest. This is calculated on the principal and on the accumulated interest (i.e. "interest on interest"). This form of interest is preferable if you have investments or savings that you are being paid interest for.
The total interest either earned or paid depends on the principal sum, the interest rate, whether the interest is simple or compound, the compounding frequency and the length of time over which it is lent, borrowed or deposited.
What does p.a. mean?
You will often see "p.a." after the percentage symbol in an interest rate. It stands for "per annum" and means the rate is an annual rate. With financial products, annual interest is calculated regularly (usually daily) as you make regular repayments to a loan or put more money into your savings account.
Why is the annual interest rate important?
The annual interest rate is important because it gives you a good idea of how much money you are going to earn from your investments (in the case of savings accounts and term deposits) or how much you are going to pay on your finance (in the case of loans and credit cards).
How is interest calculated?
Interest is calculated differently, depending on whether the interest is simple or compound. The formulas for each are as follows:
Simple interest. You can calculate simple interest by multiplying the principal sum by the rate and the term of the loan. So the formula is: I = P x R x T
To demonstrate, say you have a loan of $30,000 at a rate of 8% p.a. on a loan term of 3 years. The calculation will look as follows: 30,000 x 0.08 x 3 = 7,200Therefore, over the life of the loan, you will pay $7,200 in interest payments.
Compound interest. The formula for compound interest is a little more complicated:A = P(1 + r/n) ^ ntP, once again, is the principal sum of the amount borrowed. r is the annual interest rate and n is the number of times interest is compounded in a year. The term in years is t, and A is the total sum on money accumulated, including interest, after t years. If we use the same amounts as above and imagine that the total amount of times that interest is compounded in a year (n) is 4, the sum is the following:A = 30,000(1 + 0.08/4) ^ (4 x 3)A = 30,000 x 1.02 ^ 12A = 30,000 x (1.27)A = 38,100This means that the total amount repaid over 3 years would be $38,100. If we then subtract the principal from this ($30,000), we can calculate that the total interest over this period with a compound interest rate would be $8,100.
Why do you pay interest?
Paying interest on finance, such as credit cards, home, personal, business and car loans, is done for a variety of reasons. Predominantly, it's because lenders are businesses and receiving interest payments for lending money is how they make a profit. Interest rates are also paid for the convenience of acquiring finance that you did not earn or save and for the inconvenience on the part of the borrower of lending it.
Interest rates are also charged in case borrowers default on loans. For example, default rates on personal loans stand at around 3.5%, but if interest is paid on all loans lent, that risk is mitigated and accounted for and lenders will still make money, even with this expected loss.
Is it better to have a higher or a lower interest rate?
Whether you need a high or a low interest rate will depend on the type of financial product that you're talking about. If you're looking for a term deposit or savings account, you'll typically want to get the highest interest rate possible, so that your investments make you the most money possible. However, if you're looking for a loan, you'll generally want to aim for lower rates.
Paying a lower interest rate on a loan will usually mean that you pay less money over the life of the loan. However, this is not always the case as some loans may have low rates but high fees attached. Always look at the comparison rate when considering the overall cost of a loan.
You may also want to opt for a loan with greater flexibility or additional features that cost slightly more, but are specifically beneficial to you, such as a redraw facility or repayment flexibility. Therefore, it isn't always necessarily better to have the lowest interest rate on the market.
What is the comparison rate?
The comparison rate is a representative rate that includes both the interest rate and fees. It's useful to look at the comparison rate when considering products as it shows you the true cost of the loan, not just the rate or the fees separately.
What is considered a high interest rate?
"High" interest rates will vary depending on the financial product in question. Below, we shall outline typically "high" interest rates for a variety of financial products:
Savings account. 1-1.3% p.a.
Term deposit. 1-1.3% p.a.
Credit card. 20-22% p.a.
Personal loan. 16-18% p.a. for standard personal loans. Payday loans, on the other hand, can have an interest rate of up to 35% p.a.
Car loan. 15-17% p.a.
Home Loan. 4.5-5% p.a.
Business loan. 12-13% p.a. However, this will vary largely depending on what type of business finance you are applying for.
What to weigh up: The pros and cons of a low interest rate
Potentially lower repayments. In the case of loans, having a lower interest rate can often mean that your repayments are lower.
Potentially lower overall cost. Loans will usually end up costing you much less over their lifetime than if you had a higher interest rate.
Less yield on investments. If you have a low interest rate on your savings account or term deposit, you will earn less money.
May have high fees. Some lenders drive down their interest rates but have very high fees attached, which may cost you more overall.
Less flexibility. With loans, you may find that because your interest rate is low, you have less flexibility in what you can do with your loan.
What are the different types of interest rates?
There are two main types of interest rates: fixed and variable.
Fixed interest rates. This is a set interest rate that is essentially "locked" for the duration of your loan term. The rate you agree to in your loan contract is guaranteed to remain in place until you close the loan out at the end of the term.
Variable interest rates. This is a rate that may change during your loan term. This may be more likely for some products than for others. For example, personal loans can come with variable interest rates but it is unlikely for the rate to change during the loan term while it's much more likely a home loan with a variable rate will change.
How is interest charged on different financial products?
Interest works very differently depending on the type of product you have:
Credit cards
Credit cards come with variable, annual interest rates. The rates vary a lot depending on what features the card offers, but you can generally find a basic, no-frills credit card for between 8-13% p.a. while a rewards or feature-packed card can set you back between 17-22% p.a.
You will find two types of interest rates on a credit card: purchase rate and cash advance rate. The purchase rate is what you're charged to make purchases on the card and the cash advance rate is what you're charged to withdraw cash using the credit card. Credit cards can also offer special interest rates such as introductory 0% rates or balance transfer rates.
Another feature of credit cards is interest-free days. This refers to the period of time between making a purchase and when you will be charged interest on that purchase. If you pay off your credit card balance during this period, you will not be charged interest. Most credit cards offer 55 interest-free days.
Personal loans
Personal loan interest rates can be fixed or variable and are annual rates. These rates used to very much reflect the market, specifically the cash rate, but lenders have recently been moving towards personalising interest rates based on how risky it is to offer you the loan.
This is why there are now two types of interest rates you will see advertised for personal loans: set rates and risk-based rates. Set rates will be given to everyone who is approved for a personal loan for that lender. Lenders offerings risk-based interest rates will be advertised using a range, for example, 7-18% p.a., and you can be approved for an interest rate between that range. Usually, you can get an estimate of the rate you will receive before you fully apply for a loan and without it affecting your credit score.
Home loans
Home loan interest rates can also be fixed or variable. Fixed interest rates are guaranteed not to change whereas variable rates may fluctuate. With home loans, fixed interest rates usually only apply for the initial stage of a loan, for example five years. Variable home loan interest rates can change quite frequently as they are heavily influenced by factors in the market, especially the RBA Cash Rate. The interest you are charged will generally be calculated daily. Home loans can also either be principal and interest, meaning you're repaying both the interest you're being charged and the original amount you borrowed, or interest-only, so you are only repaying the interest accruing on your debt.
Savings accounts
Savings accounts work differently from credit accounts because the interest rates earn you money rather than cost you money. All savings accounts come with a variable base rate, with most calculated daily on your principal balance and paid into your account monthly. This is referred to as compound interest: the interest repayments you earn then go on to earn interest themselves.
Some savings accounts can also offer you bonus interest on top of the standard base variable rate, which may be for an introductory period, such as for the first three months after opening the account or applied monthly if you meet certain conditions, such as regularly depositing money into the account.
How should you compare interest rates?
Keep the following in mind when comparing interest rates:
The actual rate. Look at how competitive the interest rate is when comparing. While the cheapest isn't necessarily the best, a better interest rate can do a lot to save you money in the long run.
The comparison rate. The comparison rate includes both the interest rate and any upfront and ongoing fees. It is more representative of the true cost of the loan and can give you a good idea of how competitive it is overall, so it's useful to compare.
Like-for-like. While comparing interest rates across products is a good idea, make sure the products you are comparing are similar. For example, you might compare one credit card to another one with a much lower interest rate but it doesn't mean it comes with the same features. See what features and benefits the products offer and ensure you are comparing similarly-featured products.
Compare interest rates across loans, credit cards and savings accounts
We update our data regularly, but information can change between updates. Confirm details with the provider you're interested in before making a decision.
We update our data regularly, but information can change between updates. Confirm details with the provider you're interested in before making a decision.
We update our data regularly, but information can change between updates. Confirm details with the provider you're interested in before making a decision.
Our personal loan comparison is completely free to use. There are no costs at all for you to use our database to find a better deal. Better still, we regularly run exclusive deals that you won't find on any other site.
We're experts
We've researched and reviewed hundreds of loans as part of our Finder Awards. Our database and tables are always up-to-date and our in-house experts regularly appear on Sunrise, 7News and SBS News.
We're independent
We are independently owned and have a mission to help Australians make better financial decisions. That means our opinions are our own and you can compare nearly every personal loan in Australia (and find a better deal).
We're here to help
Since 2014, we've helped 300,000+ people find a personal loan by explaining your options simply. You don't need to give us any details to use our comparison. We're here to help you make a decision.
Elizabeth Barry is the lead editor for Finder. She has over 10 years' experience writing about a range of topics with a focus on personal finance. You’ll find her writing and commentary in a range of publications and media including Seven News, the ABC, MSN, the Irish Times and Singapore Business Review.
If you're wanting to bolster your application, buy an asset with your partner or apply for a loan you're not eligible for by yourself, you can consider a joint application personal loan.
Are you in need of a larger loan but concerned about your credit history? There still may be options available, no matter your credit history. Read our guide to find out what might be available to you.
Do you need to cover the costs of an elective surgery or unexpected medical bill? Compare a range of personal loans for medical expenses and cosmetic procedures.
How likely would you be to recommend finder to a friend or colleague?
0
1
2
3
4
5
6
7
8
9
10
Very UnlikelyExtremely Likely
Required
Thank you for your feedback.
Our goal is to create the best possible product, and your thoughts, ideas and suggestions play a major role in helping us identify opportunities to improve.
Important information about this website
finder.com.au is one of Australia's leading comparison websites. We are committed to our readers and stands by our editorial principles
We try to take an open and transparent approach and provide a broad-based comparison service. However, you should be aware that while we are an independently owned service, our comparison service does not include all providers or all products available in the market.
Some product issuers may provide products or offer services through multiple brands, associated companies or different labeling arrangements. This can make it difficult for consumers to compare alternatives or identify the companies behind the products. However, we aim to provide information to enable consumers to understand these issues.
We make money by featuring products on our site. Compensation received from the providers featured on our site can influence which products we write about as well as where and how products appear on our page, but the order or placement of these products does not influence our assessment or opinions of them, nor is it an endorsement or recommendation for them.
Products marked as 'Top Pick', 'Promoted' or 'Advertisement' are prominently displayed either as a result of a commercial advertising arrangement or to highlight a particular product, provider or feature. Finder may receive remuneration from the Provider if you click on the related link, purchase or enquire about the product. Finder's decision to show a 'promoted' product is neither a recommendation that the product is appropriate for you nor an indication that the product is the best in its category. We encourage you to use the tools and information we provide to compare your options.
Where our site links to particular products or displays 'Go to site' buttons, we may receive a commission, referral fee or payment when you click on those buttons or apply for a product. You can learn more about how we make money.
When products are grouped in a table or list, the order in which they are initially sorted may be influenced by a range of factors including price, fees and discounts; commercial partnerships; product features; and brand popularity. We provide tools so you can sort and filter these lists to highlight features that matter to you.
Please note that the information published on our site should not be construed as personal advice and does not consider your personal needs and circumstances. While our site will provide you with factual information and general advice to help you make better decisions, it isn't a substitute for professional advice. You should consider whether the products or services featured on our site are appropriate for your needs. If you're unsure about anything, seek professional advice before you apply for any product or commit to any plan and read any disclosure documents (such as any Target Market Determination (TMD) and/or Product Disclosure Statement (PDS)) issued by the provider before making a decision.
Providing or obtaining an estimated insurance quote through us does not guarantee you can get the insurance. Acceptance by insurance companies is based on things like occupation, health and lifestyle. By providing you with the ability to apply for a credit card or loan, we are not guaranteeing that your application will be approved. Your application for credit products is subject to the Provider's terms and conditions as well as their application and lending criteria.
Please read our website terms of use and privacy policy for more information about our services and our approach to privacy.
