Up until today, if you were looking for a car loan, you might have been offered a higher interest rate than you could (or should) have received.
This could happen under a "flex commission" practice, when lenders provided a range of interest rates that car dealers and finance brokers could charge a consumer. Summarising, a car dealer or broker could offer consumers any interest rates within a established range, despite the consumers' credit score or ability to repay the loan. Higher rates, higher commissions.
ASIC has placed a ban on the flex commissions, starting from 1 November 2018, to protect consumers that do not have the negotiation skills or power to lock in a fair interest rate. ASIC aims to create a more transparent and fair car finance market:
- Consumers should be offered an interest rate that is based on their financial position and credit score, rather than their ability to negotiate.
- Consumers are more likely to be offered interest rates by car dealers that are competitive compared to what other lenders are providing.
- Vulnerable consumers will not be charged high interest rates simply because they are not able to negotiate lower rates.
- The lender – not the car dealer – has responsibility for determining the interest rate that applies to a particular loan.
- The car dealer cannot suggest a different rate that earns them more commissions. They will have a limited capacity to discount the interest rate, but only to reduce the price so that it operates to benefit the consumer.
Lenders and car dealers have been adjusting their loan pricing models and remuneration arrangements to be compliant from 1 November 2018.
So if you are looking a car loan, you could now save thousands of dollars, as per ASIC's example below:
- Before 1 November 2018 – they were at risk of being charged uncompetitive interest rates. If they were sold finance at 16% then they would accrue interest charges of $11,477 on the loan of $25,000.
- After 1 November 2018 – they are charged an interest rate based on their credit rating. If they are offered finance at 10% then they would pay interest charges of $5,415. As a result, they will save $6,062 and also pay $101 less per month.
Info extracted from ASIC, 18-329MR ASIC ban to improve car finance practices begins.