What many people don’t realise is that car dealers often have the discretion to set their own interest rates unfairly just to boost the commissions they earn.
Recently, the Australian Securities and Investment Commission (ASIC) decided to ban flex commissions in the car finance market in an effort to stop car dealers charging unfair interest rates on car loans in order to increase their profits.
The term ‘flex commissions’ refers to car dealers setting higher interest rates than the actual rate offered by the lender. In some cases, the finance officer within the car dealership could set an interest rate as much as 7% higher than the standard interest rate offered by the lender.
The result is that the car dealer earns higher commissions, while the customer ends up paying potentially thousands of dollars more in interest charges over the term of the loan than they needed to pay.
In an effort to stop shady car dealers from overcharging consumers to line their pockets, ASIC has now prohibited flex commissions, using its power to modify various sections of the National Credit Act. Car dealers will no longer be able to increase their profits unfairly by using flex commissions.
Instead, the lender will determine the rate charged to the customer. Lenders will also pay a standard commission to the car dealer based on the loan amount.
It still pays to shop around for car loans
While the ban on flex commissions may help keep interest rates in line for many customers, it doesn’t automatically mean that getting your car finance from the dealership will mean getting the best deal.
It’s true that the lender will set the rates offered by the finance officer at the car dealer. However, it’s important to remember that car dealers may only have affiliations with one or two preferred lenders.
It’s also worth keeping in mind that the loan terms offered at the dealership may not always be in your best interests. Steep exit fees, early repayment penalties, or other hidden terms and conditions may apply, so it pays to read the fine print before signing on the dotted line.
By comparison, a good mortgage broker or financial consultant may have access to a panel of multiple lenders with broader financing options to choose from.
If you’re serious about getting the best deal on your car finance, it still pays to shop around. It may be possible to locate a lender willing to offer a reduced interest rate or better loan terms to suit your individual needs.
Take the time to discuss your needs with a mortgage broker before submitting a finance application.
Finance & Property Consultant
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Disclaimer: We recommend that you seek independent financial and taxation advice before acting on any information in our articles and newsletters. They contain general information only and have been prepared without taking into account your personal objectives, financial situation or needs. We recommend that you consider whether it is appropriate for your circumstances. Your full financial situation will need to be reviewed prior to acceptance of any offer or product. Interest rates are subject to change without notice. Lenders terms, conditions, fees & charges apply.