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Financing your car is about to get a bit fairer

By David Bonnici, 29 Oct 2018 Car Advice

Financing your car is about to get a bit fairer

A little-known practice by car dealers that can add thousands of dollars to the bottom line of a new or used car will be officially banned from this week

Car dealers will no longer be able to "have a lend" and charge whatever interest rate they like under new legislation that comes into effect this week, and it has the potential to save buyers thousands of dollars in car loan repayments.

Flex commissions paid by lenders to car finance brokers, most of whom are car dealers, will be banned from November 1.

Until now, flex commissions have allowed and encouraged car dealers to set higher interest rates in order to receive a higher kick back from the lender. The commissions paid on each loan are determined by the 'flex amount' – which is the difference between the base rate and the interest rate of the loan sold to the consumer.

But the Australian Securities and Investments Commission (ASIC) has now banned the practice after public consultation revealed many consumers were paying excessive interest rates on their car loans.

 “We were particularly concerned about the impact on less financially experienced consumers,” said ASIC Deputy Chair Peter Kell on announcing the ban in September 2017.

“Most consumers would be surprised to learn that when you are buying a car on finance, the car dealer can, for example, decide whether you will be charged an interest rate of 7.0 percent or one of 14.0 percent – regardless of your credit history.

“Flex commissions do not operate in a fair and transparent way, and ASIC’s action will ensure that consumers are not charged excessive interest rates,” said Kell.

The ban means the lender, not the car dealer, has responsibility for determining the interest rate that applies to a particular loan.

Read next: Q&A with 'The Barefoot Investor,' Scott Pape

Car dealers will be forbidden from suggesting a rate that would earn them a higher commission, however they will have a limited capacity to discount the interest rate as a buyer incentive, and receive lower than standard commissions, leading to lower costs for credit.

Car loans from third-party lenders via a car dealer shouldn’t be confused with factory finance, which is underwritten by the car manufacturers, who can set interest rates for individual customers based on their credit score.

John Chandler, the president and CEO of Toyota Financial Services says scrapping flex commissions will give automotive finance lenders a greater ability to offer accurate and customised rates thus improving the customer experience.

“The introduction of this new ASIC legislation is very welcomed and helps the entire industry,” Chandler said.

“[It] represents the next step in the evolution of purchasing a vehicle, which we regard as a welcome change,” he said.

Of course, you’re not obliged to finance your car through whoever you buy it from so it's often worth shopping around to find the best possible rate.

Additionally, sometimes car dealers will offer a lower price for the car if you borrow through them. If that’s the case, do the maths to see if any extra interest you pay with loan they offer will end up costing you more than any additional purchase price.

Click on the link for information on HOW TO FINANCE YOUR CAR.