ASIC bans flex commissions to encourage fairer car finance

ASIC bans flex commissions to encourage fairer car finance

A formal ban on car finance flex commissions has been introduced by the Australian Securities & Investments Commission (ASIC), to help protect financially inexperienced consumers from excessive interest charges on their car loans.

Flex commissions are paid by lenders to car finance brokers (typically car dealers), and are based on the car loan interest rates set by these brokers. The higher the rate, the larger the flex commission the broker receives. In some cases up to 80% of the flex amount (the difference between the lender’s base rate and the dealer’s interest rate) can go to the dealer.

Two previous rounds of ASIC consultations with industry bodies, lenders, car deals and consumer groups found that flex commissions create poor consumer outcomes, with borrowers potentially paying thousands of dollars more for their car loans than necessary. Based on approximately 25,500 contracts written by seven lenders in May 2013, ASIC found that about 15% of consumers (approximately 3800 people a month) were charged an interest rate of 700 basis points (7%) or more above the base rate.

ASIC deputy chair, Peter Kell, said that the industry-wide ban was necessary to create a more level playing field for both lenders and consumers, as while many lenders recognised the issues with flex commissions, ceasing to pay them would have put these lenders at a competitive disadvantage.

“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% or one of 14% – 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.” 

The new ASIC legislation still provides car dealers with some flexibility in setting the interest rates for dealer finance, allowing them to discount the interest rates they offer and receive lower commissions so that their customers can enjoy lower credit costs.

Lenders and dealerships will have until November 2018 to update their arrangements to comply with the new law.

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Learn more about car loans

What is dealer finance?

Dealer finance is a car loan organised through a car dealer – as opposed to car loans organised by a finance broker or directly by the lender.

Can I get car finance on a pension?

 

Yes, as long as you meet basic criteria set out by lenders you are eligible for car finance. Your interest rate will be determined based on your financial history which can be found in your credit report, your income and any property you may own.

Comparing car loans for pensioners before you settle on one is important though, if you want to secure the best possible loan for your circumstances.

Can I get a car loan with poor credit?

Poor credit doesn’t necessarily mean you won’t be able to get finance for your car purchase, though your options aren’t likely to be the same as someone with good credit.

In fact, a number of specialist lenders exist offering car finance for customers with poor credit, able to provide access to bad credit car loans.

However having a history of poor credit will likely mark you as a potential risk to lenders, so your car financing needs could see higher fees and interest rates. Alternatively, consider a secured car loan, which is a type of loan that uses the car you purchase as collateral, reducing the risk.

Other options include getting someone close to act as a guarantor for your car loan, or to talk to a broker about a personalised rate specific to your circumstances.

Where can I find lenders who offer no credit check car loans?

There are companies that claim to offer no credit check car loans. However, you may find that companies that offer no credit check car loans have high fees and high interest rates.

You might be better off finding a specialist lender who will look at your credit history and income, who will decide whether or not you are able to responsibility pay back the loan. Alternatively, you could contact a car finance broker.

What is a finance broker?

Finance brokers help borrowers organise car loans with lenders – that is, they act as middlemen between borrowers and lenders. While lenders will only recommend their own products, finance brokers recommend products from a range of lenders. Finance brokers need to be accredited with a lender to do business with that lender; a typical broker will be accredited with between 10 and 30 lenders. Finance brokers generally don’t charge consumers; instead, they receive commission payments from lenders.

Where can I find lenders who offer no credit check car loans?

You can find lenders who offer no credit check car loans through comparison sites like RateCity or by doing an online search.

One thing to bear in mind is that lenders who offer no credit check car loans are likely to charge higher interest rates and higher fees than on car loans that include a credit check. Also, lenders who no credit check car loans might expect you to pay a higher deposit. You might also be expected to provide security.

Lenders regard no credit check car loans as riskier than other car loans, which is why it’s a niche product that often features special conditions.

Who provides bad credit car loans?

Lenders that provide bad credit car loans tend to be smaller challenger lenders rather than the bigger banks.

Bad credit car loans are a niche product. The bigger banks tend to focus on mainstream car loan finance for borrowers with better credit histories. That’s why smaller lenders tend to be the ones that provide bad credit car loans.

Bad credit car loans can have high interest rates and fees, so it’s important to compare options before submitting an application.

Can I get a no credit check car loan?

You may be able to get a no credit check car loan in certain circumstances, although it’s important to weigh up your options before doing so.

Most lenders refuse to provide no credit check car loans, because they don’t want to give loans to borrowers without first confirming that they have a track record of repaying debts. So any lenders that do provide no credit check car loans would take measures to protect themselves against the risk of default.

That’s why no credit check car loans have higher interest rates than other car loans. Also, borrowers often have to provide security and put down a larger deposit.

How much is your car worth?

If you already own a car, you could potentially bring down the cost by selling your car in the process. Before that happens, though, you’ll need to find out how much your car is worth.

One of the first places to find this value is to research the value of your current car, giving you an idea of roughly how much it’s worth in its peak condition.

There are plenty of websites that offer a free online valuation, allowing you to enter your car’s make, model, year, badge and description, with results listing a price guide based on both selling your car privately and through a dealership.

Of course, dealerships will try to profit on your trade-in by buying it for less than they can sell it, making it highly unlikely that you’ll get the same price selling a car to a dealer as you would selling a car privately.

However, private car sales can be costly and can take months to sell, making car trading more convenient with a guaranteed return, even if you may not be able to realise the total value of your car’s worth.

Remember that everything is negotiable. If the dealership is offering you less for your trade than you wanted, try to negotiate elsewhere to gain that money back. Start by negotiating on the price of the trade and then ask them if they can give you a further discount on your new car.

What is an unsecured car loan?

An unsecured car loan is a loan that is not connected to a form of security, or collateral. Not all lenders provide unsecured car loans – and if they do, they generally charge higher interest rates for their unsecured car loans than their secured car loans.

Do low interest no credit check car loans exist?

Some companies will advertise no credit check car loans, however under the Australian National Consumer Credit Protection act, credit checks are required by all responsible lenders, so such lenders are likely to have high interest rates. Depending on your income and credit history, you may qualify for a low interest StepUP loan from Good Shepherd Microfinance.

Where can I get a guarantor car loan?

There are multiple lenders who are willing to provide loans secured by guarantors.

If someone is willing to go guarantor for you and they meet the requirements set out by lenders, you can apply for guarantor finance online, over the phone, or in person.

Some banks also provide guarantor car loans, though because they’re larger banks, they may have higher interest rates than smaller lenders.

You may want to compare guarantor car loans at RateCity, and find a guarantor car loan ideal for your purposes.

How do you get a car loan?

There are four different ways you can get a car loan. You can go straight to a lender. You can get a finance broker to organise a car loan for you. You can get ‘dealer finance’ – which is when the car dealer organises a car loan for you. Or you can organise your own car loan through a comparison website, like RateCity.

Whichever method you choose, you will need to provide proof of identification, proof of income and proof of savings. So you may be asked for any combination of passport, driver’s licence, bank statements, payslips, tax returns and utility bills. You might also be asked to provide proof of insurance.

What is a car loan?

A car loan, also known as vehicle finance, is money that a consumer borrows with the express purpose of buying a vehicle, such as a car, motorbike, van, truck or campervan. Car loans can be used for both new and used vehicles.