How the new car loan regulations will affect you
Starting from the 1st of November 2018, the car finance industry is set to change with the mandatory regulation introduced by ASIC to ban “flex commissions”, in an effort to protect vulnerable customers from being charged excessive interest rates on their car loans.
Flex commissions are incentive-based payments made by lenders to car finance dealers or brokers to reward them for negotiating higher interest rates with customers.
The “flex commission” arrangement between lenders and dealers essentially allows dealers to set a customer’s interest rate on a case-by-case basis, far above the base rate set by the lender. The margin between these rates form the commission received by dealers – the higher the interest rate, the higher the commission.
According to a study conducted by ASIC, approximately 15% of customers were charged an interest rate that was 7% higher than the base rate offered by the lender – regardless of the individual’s credit history.
Details of the ban
- Interest rates for particular loan products will be determined by the lender, not the car dealer or broker.
- Car dealers or brokers will be forbidden from suggesting a rate that would earn them a higher commission.
- Car dealers or brokers will have limited ability to discount interest rates and receive lower commissions to ensure level playing field for all lenders.
What does this mean for you?
Under the new regulations, lenders will now be responsible for determining the interest rate and car dealers are no longer able to charge more than the base rate set by the lender, which might mean few car dealerships will offer finance as part of the car purchase process.
If you are looking to get a car loan, the potential rate will now be more closely related to your personal credit score, providing more transparency in the car buying process.
You can visit our Learning Hub and ASIC’s MoneySmart website for more information about making informed decisions when choosing a car loan. Download ASIC’s MoneySmart Cars app, which could help you avoid common traps and identify hidden costs when you visit a car dealership.
If you haven’t already, get your free Experian credit score and credit report summary with Credit Savvy today!