The short answer
Compare the effective (reducing-balance) rate, calculated from the cash flows, quoted nominal p.a. A flat rate understates the cost of finance. A comparison rate is only comparable if it is calculated the way the law defines one.
| Rate | What it measures | Same illustrative lease |
|---|---|---|
| Flat rate | Interest as a % of the original amount, every year, as if you never paid any of it down | 5.36% |
| Effective rate (nominal p.a.) | The real reducing-balance rate on the money you actually owe | 8.00% |
| Effective annual rate (compounded) | The same rate compounded monthly over a year | 8.30% |
Flat rate
A flat rate charges interest on the full amount for the full term, even though the balance falls with every payment. Expressed that way, the example lease is 5.36% — about two and a half points below its real 8.00%. Nothing about the deal changed; only the way it is described. If a quote's rate looks low for the payment, it is often flat.
Comparison rate
In Australian consumer credit, a comparison rate is a defined figure: it rolls most fees and charges into the rate and is calculated on a standard loan amount and term, so different lenders can be compared. A number labelled "comparison rate" on a novated lease quote is not always calculated that way, and fees that sit outside the finance (management fees, running-cost budgets) are not in it. Treat it as a claim to check, not a standard.
Effective rate
The effective, or reducing-balance, rate is the one you can calculate yourself from the payment, term, residual and amount financed. It is the only one of the three that is the same for the same cash flows whatever the quote calls it. Quoted nominal, it is directly comparable with any Australian loan rate.
Watch for "effective" meaning two things
"Effective rate" is sometimes used for the reducing-balance rate quoted nominal (8.00% here) and sometimes for the compounded annual rate (8.30%). Both are legitimate, but they are not the same number, so a table that lists one next to a provider's quoted rate is not comparing like with like.