Flexing muscle on car dealer finance
HERE'S some good news for car buyers. Our money watchdog ASIC has cracked down on so-called "flex” commissions paid to car dealers, putting motorists in a better position to secure competitive finance at the car yard.
Flex commissions are paid by lenders to car finance brokers - typically car dealers.
The problem with this type of commission is it allows dealers to arrange car loans at a higher interest rate than the lender's lowest available rate. As a guide, ASIC found a car dealer may be able to decide whether a customer will be charged an interest rate of 7 per cent - or one of 14 per cent - regardless of the buyer's credit history.
The dealer is then paid a commission based on the difference between the lender's base rate and the interest rate sold to the consumer - the "flex amount”.
The higher the rate, the larger the commission for the dealer. But for car buyers, this system can mean paying thousands of dollars more in interest charges over the life of the car loan.
The ban on flex commissions makes lenders more responsible for determining the rate that applies to a particular car loan. And that's a plus for consumers.
Nonetheless, the whole issue highlights the importance of shopping around for finance before you hit the car yards.
It's very easy to focus on how your next set of wheels will look and feel without giving thought to the true cost of the car after allowing for finance charges.
Yet it's a cost that can significantly add to the total paid for a vehicle.
By way of example, on a car costing $25,000, using a five-year loan with a rate of 12 per cent, which is the current rate among some of our bigger banks, you can expect to pay total interest of $8366.
However, comparison sites like Finder show a reasonable selection of car loans available for 8 per cent (in some cases less), and at that price, a five-year loan on the same car would cut your interest bill to $5414 - a saving of $2952.
If you're new to the car buying experience, take a look at ASIC's MoneySmart Cars app.
It's free to download, and it can help you avoid common traps and identify hidden costs when you hit the car yards.