Worked Examples and Checklists
Low rate with fees or higher rate with none? A personal loan comparison rate worked example
A worked example showing how establishment and monthly fees change the true cost of a personal loan, why the result flips between small and large loans, and how to do the sum yourself.
Whether a lower interest rate with fees beats a higher rate with no fees depends on how much you borrow and for how long. In the illustrative example below, a 9.5% loan with a $600 establishment fee and a $12 monthly fee is cheaper than an 11.9% no-fee loan when you borrow $30,000 over five years, but it costs about $674 more when you borrow $8,000 over two years. Fees are mostly flat dollar amounts, so they weigh heavily on small, short loans. That is also why a comparison rate calculated on the $30,000, five-year benchmark can understate the cost of a smaller loan.
This guide is part of the personal loan requirements guide. The two loans are hypothetical, not real lender offers.
The two offers
| Loan A | Loan B | |
|---|---|---|
| Interest rate | 9.5% a year | 11.9% a year |
| Establishment fee | $600 | $0 |
| Monthly account fee | $12 | $0 |
| Comparison rate on $30,000 over 5 years | about 11.19% | 11.9% |
On the benchmark, Loan A looks better: its comparison rate is about 0.7 percentage points lower.
Scenario 1: $30,000 over five years
Loan A
- Monthly repayment: about $630.06
- 60 repayments: about $37,803
- Plus establishment fee $600 and monthly fees $12 × 60 = $720
- Total paid: about $39,123
Loan B
- Monthly repayment: about $665.82
- 60 repayments: about $39,949
Loan A is cheaper by about $826, matching what the comparison rates suggest.
Scenario 2: $8,000 over two years
Loan A
- Monthly repayment: about $367.32
- 24 repayments: about $8,816
- Plus establishment fee $600 and monthly fees $12 × 24 = $288
- Total paid: about $9,704
Loan B
- Monthly repayment: about $376.21
- 24 repayments: about $9,029
Now Loan B is cheaper by about $674. Measured as a true annual cost on the money you use, Loan A works out at about 20.7% for this smaller, shorter loan, against 11.9% for Loan B. Yet Loan A's advertised comparison rate would still be about 11.19%, because it must be calculated on the benchmark.
Why the answer flips
| Factor | Effect on Loan A's true cost |
|---|---|
| Smaller loan | The $600 fee is a larger share of the money borrowed |
| Shorter term | The fee is spread over fewer years |
| Monthly fee | Same dollars each month regardless of balance, so heavier as the balance falls |
| Early payout | The upfront fee is spread over even less time |
A rough rule of thumb for amortising loans: the upfront fee as a percentage of the loan, divided by the term in years, and then roughly doubled (because the average balance is about half the original loan), gives the approximate addition to the annual rate. For Loan A at $8,000 over two years: $600 ÷ $8,000 = 7.5%; ÷ 2 years = 3.75%; × about 2 ≈ 7.5 points, plus the monthly fee. The exact calculation gives about 11.2 points above the 9.5% rate in total, consistent with the rule's rough estimate.
Doing the comparison yourself
- Write down each offer's interest rate, establishment fee, monthly fee and early repayment fee.
- Enter your amount, rate and term in the repayment calculator with the establishment fee as the upfront fee.
- Add the monthly fee multiplied by the number of months. The fee impact calculator does this step and shows the share of the loan used up by fees.
- If you might pay out early, rerun the totals for the shorter period and add the early repayment fee.
- Choose the offer with the lowest total for your realistic scenario, then check features such as extra repayments.
Checklist of questions for the lender
- Is the establishment fee fixed, or does it depend on my risk profile?
- Is the fee paid upfront or added to the loan?
- Is the monthly fee charged until the original end date if I repay early?
- Are there fees for extra repayments or changing the repayment date?
- What is my personalised comparison rate for this amount and term?
When fees are worth paying
Fees are not automatically bad. A loan with an establishment fee can be the cheapest option when:
- you are borrowing a larger amount over a longer term,
- the rate discount is substantial, and
- you do not expect to repay early.
If you think you may repay early, a no-fee variable loan with free extra repayments often wins. See paying off a personal loan early and the comparison rate guide. For a three-way comparison, see comparing personal loan quotes.
Frequently asked questions
Why doesn't the lender show the comparison rate for my loan amount?
The law requires the comparison rate in advertising to be based on prescribed benchmark amounts and terms, so all lenders are comparable. You can ask the lender, or calculate it yourself from the fees and repayments.
Is an establishment fee negotiable?
Sometimes. Lenders may reduce or waive it for existing customers or strong applicants. Ask before you apply.
Does a monthly fee stop if I repay early?
It should stop once the loan is closed, but read the contract and ask for a payout figure that shows exactly what you will be charged.
Are fee-free loans always variable?
No. Some fixed-rate loans have no establishment or monthly fee, and some variable loans charge fees. Compare each offer on its own terms.
Sources and where to check
- ASIC Moneysmart — comparing personal loans and fees
- ASIC — comparison rate requirements under the National Credit Code
- Federal Register of Legislation — National Consumer Credit Protection Regulations 2010
