Interest Rates Guide

Knowing what an interest rate is and how it works is one of the most important pieces of knowledge a potential borrower needs to have.

Interest is the price a borrower pays to borrow money from a lender. It can also be the amount that is earned on deposited funds in an account such as a savings account. Lenders who charge interest are essentially placing a leasing charge on an asset’s use. When talking about loans, the asset is money, so it’s important to understand the ins and outs of interest rates.

Interest rate basics: What does p.a. mean?

P.a. literally means per annum, or every year. When interest is expressed as a percentage followed by the term p.a., it means that the rate you are looking at is the yearly rate. The p.a. rate can either be calculated at the end of the year, or compounded as often as each month. More on the difference between simple interest and compound interest is covered in the savings account section below.

Credit card interest

Credit cards can have varying interest rates. You will be able to find cards with around 13% interest on the lower end of the spectrum and cards with upwards of 20% interest on the higher end of the spectrum. These rates are calculated daily and applied monthly to any charges you make. This does not mean that you will always be paying interest on all of your purchases though, as there a few ways to avoid it.

One way is through the introductory rates which are often offered on credit cards. With an introductory rate you are receiving a very low interest rate for a set period of time after the activation of the card.

Paying off the full closing balance of your statement each month by the payment due date is another way to avoid interest charges. If there’s no balance, you can’t be charged interest.

Interest free days are a very handy feature usually offered with credit cards which allows you to pay off your purchases before the due date. Many cards will offer an interest free period on purchases. For example, if you charge $200 on your credit card at the start of your statement cycle and the card has 55 interest free days, you will have 55 days to pay off the balance. When comparing credit cards make sure to see how many interest free days are offered on purchases, as you can save a lot of money in the long term by taking advantage of them.

Compare credit cards

Rates last updated February 20th, 2017
Purchase rate (p.a.) Balance transfer rate (p.a.) Annual fee
Virgin Australia Velocity Flyer Card - Balance Transfer Offer
Velocity Frequent Flyer Offer with a Balance Transfer and earn Bonus Velocity Points
Earn 2 Velocity Points per $1 spent and save with a reduced annual fee and a 0% p.a. balance transfer offer for 18 months.
20.74% p.a. 0% p.a. for 18 months $64 p.a. annual fee for the first year ($129 p.a. thereafter) Go to site More info
St.George Vertigo Visa

0% p.a. Balance Transfer for 18 months

A long term balance transfer offer, together with a low annual fee.
0% p.a. for 6 months (reverts to 13.24% p.a.) 0% p.a. for 18 months $55 p.a. Go to site More info
HSBC Platinum Credit Card
Annual Fee Refund
This platinum card caters for those who want high credit limits and personal concierge service. The annual fee is refunded each year when you spend $6,000 on eligible purchases.
19.99% p.a. 0% p.a. for 15 months $149 p.a. Go to site More info
ANZ Platinum Credit Card - Exclusive Offer
Exclusive Offer to finder.com.au
Receive 0% p.a. for 12 months on balance transfers and 0% p.a. for 3 months on purchases, combined with an annual fee waiver in the first year.
0% p.a. for 3 months (reverts to 19.74% p.a.) 0% p.a. for 12 months $0 p.a. annual fee for the first year ($87 p.a. thereafter) Go to site More info
American Express Essential Credit Card
Smartphone Screen Insurance, $0 Annual Fee and 0% Balance Transfer
Receive a $50 credit when you spend $750 on your new card within the first 3 months from card approval and a 0% p.a. balance transfer rate for 12 months. Plus enjoy no annual fee for life.
14.99% p.a. 0% p.a. for 12 months with 1% balance transfer fee $0 p.a. Go to site More info

Loan interest rates

The interest rate that must be paid on a home or personal loan has a lot to do with the cash interest rate set by the Reserve Bank of Australia. This rate is renewed every month and lenders base their rates off of this.

You can choose to pay a variable interest rate on your home or personal loan. This type of interest rate is very closely tied to the cash rate and can be a bit unstable. The benefit of a variable rate is that they usually go down if the Reserve Bank of Australia decides to lower the official cash rate. Also, restrictions on the number of repayments you can make in a certain amount of time are usually looser with variable rates of interest. Be wary though, if the cash rate goes up, your variable interest rate will too.

Fixed rates when applied to personal loans or home loans are a good safeguard against future rises in interest rates across the board. You can lock in your interest rate for a period of 1 to 5 years in general. You won’t benefit from falling interest rates, but you also won’t have to worry about skyrocketing interest rates also. There are usually ways to refinance your loan to a lower fixed interest rate, but you may have to pay a fee.

Split interest rates let you pay a fixed rate on a portion of your home or personal loan and a variable rate on the rest. This type of interest structure is good for borrowers who want the security of regular and unchanging payments on part of their loan, with the flexibility offered by variable interest rates on the other part of their loan. The fixed portion of the loan is usually more restrictive in terms of repayment options, but as mentioned it won’t fluctuate like the variable portion.

Comparison rate

Lenders by law must provide comparison rates in order to make the loan comparison process much easier for customers. It’s normally fairly difficult to compare two loans that have differing fees and interest rates, so a comparison rate attempts to provide a top down overview of the average rate when fees and charges are taken into account.

For example, if a loan has an 8% interest rate, but fees and charges total 1% of the total cost of the loan, the comparison rate will be 9%. Whereas a loan that has a 8.25% interest rate and .5% total fees and charges will have its comparison rate calculated as 8.75%. Therefore, a loan with a lower interest rate will not always be better than one with a higher interest rate. It’s important to use the comparison rate to get a better picture of how much you will actually have to be repaying on the loan.

Keep in mind that a comparison rate for home loans is always calculated with the same loan terms: $150,000 borrowed over 25 years. This means that the rate might not always be as accurate if your loan amount of term deviates from this, so keep this in mind when using comparison rates.

Compare home loans

Rates last updated February 20th, 2017
$
Loan purpose
Offset account
Loan type
Your filter criteria do not match any product
Interest Rate (p.a.) Comp Rate^ (p.a.) Application Fee Ongoing Fees Max LVR Monthly Payment
HSBC Home Value Loan - Resident Owner Occupier only
Enjoy the low variable rate with $0 ongoing fee and borrow up to 90% LVR.
3.75% 3.77% $0 $0 p.a. 90% Go to site More info
loans.com.au Essentials - Variable (Owner Occupier, P&I)
A low-interest rate loan suited for purchases and refinances with no application or ongoing fees.
3.59% 3.61% $0 $0 p.a. 80% Go to site More info
NAB Choice Package Home Loan - 2 Year Fixed (Owner Occupier)
A fixed rate package loan with flexible repayments options. $1,500 cashback offer available, terms and conditions apply.
3.98% 4.92% $0 $395 p.a. 95% Go to site More info
State Custodians Standard Variable Spring Special - LVR 80% (Owner Occupier)
Special Owner Occupier Rate. Free Offset Account.
3.59% 3.92% $0 $299 p.a. 80% Go to site More info
Newcastle Permanent Building Society Premium Plus Package Home Loan - New Customer Offer ($150,000+ Owner Occupier)
Apply for a new owner occupier loan or refinance from another lender and receive this discounted rate.
3.74% 4.12% $0 $395 p.a. 95% Go to site More info
IMB Budget Home Loan - LVR <=90% (Owner Occupier)
A competitive budget rate without any unwanted bells and whistles.
3.87% 3.92% $445 $0 p.a. 90% Go to site More info
loans.com.au Offset Variable - Up to 80% LVR (Owner Occupier P&I)
Take advantage a 100% offset account along with no annual or application fee.
3.67% 3.69% $0 $0 p.a. 80% Go to site More info
State Custodians Breathe Easy Spring Special  - LVR 80% (Owner Occupier)
Special Owner Occupier Rate. Free Offset Account.
3.72% 3.75% $0 $0 p.a. 80% Go to site More info

Savings account interest rates

With savings accounts you earn interest on the money you have deposited. An interest rate can be calculated and paid out on a yearly basis, or compounded as often as every month. When depositing money, you will want to try and get a compounding interest rate. Here is an example of the difference between the two types of interest calculation and how they impact your bottom line:

The difference between simple and compound interest

Simple interest

Simple interest is paid only on the money you have deposited into your account and not the earnings of said account. If your savings are earning a simple, or nominal, interest rate, there is no reason to have it compounded. If you deposit $10,000 into a savings account with a 6% p.a., you will earn $600 per annum on interest.

Compound interest

Compound interest means that the interest earned on your savings is added to your balance on a regular basis. Not only does your money earn interest, but your interest earns interest as well. If you have an interest rate of 6% on 10,000 dollars in deposits and it’s compounded monthly, you will earn approximately $617 in interest over the course of a year. This is because each month, the interest is calculated on the balance plus the interest earned the month before.

Bonus rates for savings accounts

Bonus interest rates for savings accounts are higher than normal rates. Banks and other financial institutions offer bonus interest rates for a variety of reasons. You may find that a bank offers bonus rates to customers with multiple banking accounts, students or for people who use certain financial products or features that the bank offers. Always look into the potential bonus rates you can earn with each bank, as you can end up earning a lot more money in the long run with a higher rate on your savings.

Compare savings accounts

Rates last updated February 20th, 2017
$
$
months
Maximum Variable Rate p.a. Standard Variable Rate p.a. Bonus Interest p.a. Fees Min Bal / Min Deposit Interest Earned
ME Online Savings Account
Ongoing, variable 3.05% p.a. rate when you link to a ME Everyday Transaction account and make a weekly purchase with your Debit MasterCard using tap & go. Available on balances up to $250,000.
3.05% 1.30% 1.75% $0 $0 / $0 Open More
ING DIRECT Savings Maximiser
Ongoing, variable 3.00% p.a. when you link to an ING Orange Everyday bank account and deposit $1,000+ each month. Available on balances up to $100,000.
3.00% 1.60% 1.40% $0 $0 / $0 Open More
Bankwest Hero Saver
Ongoing, variable 2.65% p.a. rate when you deposit at least $200 each month and make no withdrawals. Available on balances up to $250,000.
2.65% 0.01% 2.64% $0 $0 / $0 Open More
AMP Saver Account
Introductory rate of 2.55% p.a. for 4 months, reverting to a rate of 2.10% p.a. Available on balances below $5,000,000.
2.55% 2.10% 0.45% $0 $0 / $0 Open More
Bank Australia Bonus Saver Account
Ongoing, variable 2.60% p.a. when you deposit at least $100 and make no withdrawals. Available on the entire balance.
2.60% 0.15% 2.45% $0 $0 / $1 Open More
ING DIRECT Savings Accelerator
Ongoing, variable 2.35% p.a. applies on balances $150,000 and over.
2.35% 2.35% 0.00% $0 $0 / $0 Open More

Knowing how interest works will increase your ability to compare financial products. Get familiar with it and how it’s applied to your account, whether you’re being charged interest or earning it.

Marc Terrano

A passionate publisher who loves to tell a story. Learning and teaching personal finance is his main lot at finder.com.au. Talk to him to find out more about home loans.

Was this content helpful to you? No  Yes

Related Posts

HSBC Personal Loan

A competitive fixed interest rate loan with the option to make extra repayments. Min. income $30,000

ANZ Variable Rate Personal Loan

A variable rate loan that lets you make and redraw additional repayments.

NAB Personal Loan Unsecured Variable Rate

An unsecured loan with a redraw facility that allows you to access money you've paid in advance.

Latitude Personal Loan (Secured)

Can be used for whatever purpose: renovating, buying a car, booking a holiday. Funds can be in your account in as little as 24 hours.

Ask a Question

You are about to post a question on finder.com.au

  • Do not enter personal information (eg. surname, phone number, bank details) as your question will be made public
  • finder.com.au is a financial comparison and information service, not a bank or product provider
  • We cannot provide you with personal advice or recommendations
  • Your answer might already be waiting – check previous questions below to see if yours has already been asked

Disclaimer: At finder.com.au we provide factual information and general advice. Before you make any decision about a product read the Product Disclosure Statement and consider your own circumstances to decide whether it is appropriate for you.
Rates and fees mentioned in comments are correct at the time of publication.
By submitting this question you agree to the finder.com.au privacy policy, receive follow up emails related to finder.com.au and to create a user account where further replies to your questions will be sent.

Ask a question
feedback